Your Journey through the Military & Beyond
The Best Reasons to Refinance a VA Home Loan
How do you know when the time is right to refinance a VA Home Loan for your mortgage?
You bought your first home — congratulations. The timing wasn’t perfect. Interest rates for 20- and 30-year mortgages haven’t been this high since the 1990s, between 6.5% and 8%. Over 30 years, or some part of it, you’re going to spend a lot more than the sale value of the home.
How much? That depends on where you are. On the shoreline of Connecticut, a $300,000 house with $0 down and an 8% interest rate will, over 30 years, cost you about $887,400 (assuming taxes don’t go up, which they will, or down, which they won’t — and leaving aside insurance). That’s a LOT of money.
30 years of mortgage payments plus the cost of maintenance adds up.
What if everything else remained equal and the interest rate was 7%? Well, then you’d spend $813,600 over 30 years.
My dad once told me a decent way to estimate savings on interest rates was that each 1% drop meant saving about $50,000 over the lifetime of a 30-year mortgage. You can get a decent BMW for $50,000 (and if you do the math, you’re actually saving $73,800 in this scenario). Not chump change!
So what’s a good time to refinance your home loan? When mortgage interest rates drop by at least 1 point, ideally more. You don’t want to be too cute about this because waiting for rates to drop more than one point is time you’re spending being inefficient with your existing mortgage, and while real estate is over time a very stable and reliable investment, it’s been choppy in recent years.
This is called an “interest rate reduction refinance loan” or IRRRL (that is a terrible acronym. It must be said!) and one can use it to either lower the interest rate of one’s VA Home Loan, move from a flexible to a fixed-rate interest mortgage, or both. Choose a lender carefully — but when you find one that’s reputable, you ought to be able to bundle the lender fees into the IRRRL. This is the primary reason you want to wait until the rates have dropped by at least a point — it guarantees that in the long run, you’ll make your money back.
Don’t bother with this if you plan on selling the home in the next few months, either because you’re in the service and need to move, or for some other life event. It’s not worth refinancing under those conditions. If you have a few years of payments left, having almost paid off your mortgage, it may not be worthwhile, either.
But if you’ve paid your 30-year mortgage diligently for a few years at 8% and the rates drop to 7% or lower — absolutely look into refinancing. Especially if you plan on keeping the home, making it into the place your family lives.
Another thing to consider is refinancing if your family begins making significantly more money — for example, you move from the military to the private sector and double your income — or adding an income (say, your partner can now nail down a full-time job suitable for their education, now that you’ve left the military). In such a way you might be able to get a different interest rate and pay the home off much faster.
You can refinance in order to use your mortgage like equity in case of financial emergency. This could be health related, or job related, though in either case it’s important to understand that one never wants to take a big financial step backwards unless it’s absolutely necessary. Refinancing for a loan you need (not want) is something you can really only do once. Make sure it’s done intentionally and as a last resort.
To sum it up: mortgage rates are high these days. They’re bound to go down, and sometime soon. Be ready to refinance your VA Home Loan when they do — especially if you’ve bought recently. You could stand to save a whole lot of money — which really means more money for retirement and other useful investments.
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