Is A VA Streamline Refinance Right For You? Here’s How to Find Out

You have a VA loan and know that you can refinance with the VA streamline refinance loan. Is it the right choice for you?

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While the VA streamline refinance offers many benefits, it’s not the right answer for everyone. Below we will discuss how you can tell if it’s the right option for you.

Can You Get a Lower Rate?

The VA streamline refinance has two major requirements – you must prove you made your last 6 – 12 months of mortgage payments on time and there must be a benefit to the refinance. That benefit is most commonly a lower interest rate.

Just how low does the interest rate have to be compared to your current rate? It depends on the lender and your own preferences. How much are you looking to save each month? You should also consider your break-even point. This is the point that you pay back your closing costs with the savings earned on the refinance. Once the closing costs are paid off, you can enjoy the monthly savings of the refinance. If that break-even point is too far away, though, it may not make sense.

For example, let’s say you can save $50 per month by refinancing. In order to refinance, though, it will cost you $4,000. It would take you 80 months to pay off those closing costs. While $50 a month seems worth it, 80 months is a long way off! If you have plans to move within the next 6-7 years, you’ll never see the benefit of the refinance and you just threw money out the window.

On the other hand, if your break-even point is just a few years and you have long-term plans to stay in the home, it could be well worth it. Say it took you 3 years to break-even and you took out a 30-year loan. That means you’ll save $50 a month for the next 27 years that means saving $16,200.

Can You Refinance Out of an ARM?

If you originally took an ARM or adjustable rate mortgage in order to get the lowest rate on your mortgage, you may be regretting that decision now. If your rate is about to adjust, you may find yourself wishing you had the predictability of a fixed rate loan. The VA streamline refinance enables you to refinance out of your ARM and into a fixed rate.

With this loan, you can’t figure out the break-even point because your payment may be higher than it was with the ARM. Even though your fixed interest rate may be higher than the ARM rate, it offers you the stability you need. Your benefit, in this case, isn’t saving money, per se, it’s peace of mind that a fixed interest rate can offer and in the future, who knows, you could be saving money. No one can predict just how high that ARM rate would have gotten if you kept it.

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Did You Make Your Mortgage Payments on Time?

The VA requires that VA streamline refinance clients have a timely mortgage payment history. In a perfect world, they would like to see all of your mortgage payments made on time. They do allow an exception for one late payment, but this may vary by lender. Some lenders are willing to grant that exception, while others would prefer a timely mortgage payment history.

The VA requires the timely mortgage payment history because that’s what they base your approval on, since they don’t verify your income, assets, credit score, or home value. They need to know what type of borrower you are and looking at your mortgage payment history is one of the best ways to tell.

If you had one or more late payments (more than 30 days late) on your VA loan, you may want to look elsewhere for a loan. You’ll need a lender that is willing to take the risk of a borrower that makes late mortgage payments. You may even have to wait until you have a solid 12 months of on-time mortgage payments.

Are You Staying in the Home?

The final question you should ask yourself is if you are staying in the home. If you have plans to move in the next few years, it might make those closing costs worthless. You would probably come out ahead by making the slightly higher mortgage payments for the short time you will be in the home.

It makes sense to refinance if you know you’ll stay in the home and you can keep a similar term. For example, if you have a 30-year term now but you’ve paid off a few years on the loan, you don’t want another 30-year term. That just starts you back at square one. Instead, you want a 25-year or lower term so that you can keep the same pace and pay less interest at the same time.

Knowing when it’s right to use the VA streamline refinance requires a little thinking and a lot of planning. Don’t just assume since you can save money that you’ll get ahead by refinancing. That’s not always the case. Take into consideration the points we mentioned above and then decide if it makes sense to refinance.

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