If you have a VA loan and you want to refinance it, the good news is that you can do so whenever you see it fit to do so. In other words, you don’t have a specific period of time you must wait. You can take out a new loan when you think the time is right.
So how do you know when it’s the right time to refinance your loan? Here are a few things to consider.
How Much Will You Save?
Refinancing costs money, so it’s not something you want to do often. You should only refinance when you think you will save a significant amount of money and when your break-even point is no more than 3 years away.
Your break-even point is when you payback the closing costs and start realizing the monthly savings. For example, let’s say it cost you $5,000 to take out a new loan. This new loan will save you $150 per month. You don’t realize that $150 savings right away. It will take you around 34 months to pay it back. So if you plan to be in the home for longer than the next 3 years, it may make sense to do so. If you think you might move soon after that, it may not make sense.
The Waiting Period for a VA IRRRL
Some lenders enforce a waiting period for the VA IRRRL or Interest Rate Reduction Refinance Loan. Technically, the VA does not impose any sort of waiting period. It’s the lenders that fund the loans, though. They are the ones at risk of default. Some lenders require borrowers to have their current VA loan for 12 months before they allow a refinance.
The disparity between the required waiting period comes down to the risk level. Some lenders prefer to see that the borrower has a solid 12 months of being able to make their current mortgage payment. With a solid payment history, the lender can feel confident in lending to you. If you do have a solid 12-month history, the VA does allow you to have one 30-day late payment during that time and still qualify for a VA IRRRL. If you have less than a 12-month history, though, the VA does not allow any late payments.
The Benefits of Waiting to Refinance
Sometimes it just pays to wait to refinance, no matter the rules. When you first start paying your VA mortgage payments, you put a lot of money towards interest. Very little money goes towards the loan’s principal. This means you’ll owe just about as much as you borrowed during the better part of the first year. You will see a small drop in principal, but not much. If you refinance, you start back at the beginning and you pay pretty much the same funding fee all over again.
For example, let’s say you originally borrowed $200,000 and you paid $4,300 for the funding fee. Now let’s say interest rates drop dramatically during the first six months that you have the loan. You decide to refinance with the IRRRL program. You will still owe pretty close to $200,000, which means you’ll pay another $1,000, as the VA IRRRL funding fee is 0.5%.
If you go for the cash out refinance shortly after taking out the loan, you will pay an additional 2.15% of the loan amount in a funding fee. It’s almost like paying double the funding fee during the first few years of the loan. The longer you wait, the more the principal falls, though. This can help you owe less for the funding fee, making the refinance well worth it.
The bottom line is that you can refinance your VA loan whenever you want. It’s more of a question of when does it make sense? Don’t do it just to get a lower rate. Work out all of the details and see what the true savings are after you pay off the closing costs, based on the length of time you plan to be in the home.