If you have a VA loan now, you may be eligible to refinance it with the VA IRRRL program. This refinance loan allows you to refinance your current VA loan with little verification. Any VA lender can offer you the loan, too, you don’t have to use your current VA lender.
Keep reading to learn the best way to structure it.
Figure Out What You Need
First, figure out why you want to refinance. What is your goal? Do you want a lower payment? Do you want to get out of an ARM? Do you want a shorter term? The answer to these questions will help you determine which loan is right for you. For example, if you want a lower rate, but you already have a fixed rate loan, you may have to wait until the ‘perfect rate’ comes along. It doesn’t make sense to refinance just to lower your rate of 0.125% for example. The cost to refinance will far outweigh the savings.
Once you know why you want to refinance, you can move onto the next step.
Figure Out if You’ll Pay the Closing Costs
The VA IRRRL program only allows you to refinance the current outstanding principal balance of your mortgage. But, you may include your closing costs if it makes sense to do so. If adding the closing costs won’t add too much to your payment and you don’t have the cash to pay the upfront, it can be a viable option.
Just keep in mind that when you roll the closing costs into your loan that you’ll pay interest on those closing costs for 30 years. The few thousand dollars in closing costs will increase by thousands of dollars over the 30 years of the term. If you have the money to pay at the closing, you are better off paying them upfront.
Know Your Break-Even Point
A great way to tell if the refinance is worth it is to figure out your break-even point. This is the point that you pay off your closing costs and start realizing the savings of the refinance. For example, if your closing costs were $10,000 and you’d only save $50 a month on the refinance, it probably wouldn’t make sense to refinance. It would take you 200 months or 16 years to recoup the closing costs.
Now this was obviously an exaggeration. Closing costs on a VA IRRRL don’t usually cost $10,000. But you’ll need to figure out the total of what you’ll pay to close the loan and compare it to your monthly savings. An easy equation to use is as follows:
Total closing costs/Monthly savings = Months to break even
You can then use the break-even point to decide how you will make out on the deal. If you won’t be in the home long enough to enjoy the savings after the break-even point, it won’t make sense to refinance. You may either want to try to get a lower rate, better terms, or lower closing costs. If it still doesn’t make sense, you may just want to keep the loan that you have.
One thing we cannot emphasize enough is for you to shop around for the right mortgage. Even though you are refinancing your VA loan, you can use any lender – you don’t have to use your current lender. This means that you should get quotes from at least three lenders. You won’t know what other lenders have to offer unless you apply and get quotes. This way you’ll know which loan will cost you the least, while giving you the terms that you need.
Structuring your VA IRRRL refinance loan is probably one of the easiest loans to structure. As long as you take your time and shop around, you’ll find the loan that suits you the best. Just make sure that you calculate your break-even point so that you know exactly what to expect.