What can a VA Refinance be Used for?
Perhaps a better question would be what can’t a VA refinance be used for? However, we’ll stick to the original question and hope that we can cover all of the uses for a VA refinance in just one article. The VA has several different refinance options depending on why you’re refinancing, which help to diversify the VA loan program and make it more able to accomplish a variety of different purposes. A refinance can be used to get a lower interest rate, change the type of interest rate you have, change your loan term, get cash-out on the equity you have on your home, make a large lump sum payment to lower the principal in the loan, and consolidate higher-interest rate debt.
If you’re wanting to get a lower interest rate than what you currently have, your best bet is to use the Interest Rate Reduction Refinance Loan (IRRRL), which is the VA’s streamline refinance option. The IRRRL is optimized for the purpose of getting a veteran a lower interest rate and monthly payment if at all possible. Lower interest rates can also be secured using a standard refinance, but can take longer, be more expensive, and be more complicated. Either an IRRRL or a standard refinance can be used to change the type of interest rate you have. The different types of interest rates are fixed-rate, adjustable-rate, and hybrid adjustable-rate. Most people prefer the sense of security that comes with a fixed-rate mortgage, but those who take on a hybrid adjustable-rate nearly always save money compared to their fixed-rate counterparts.
If you want to change your loan term, you can do so with any type of VA refinance, but you will be limited in the case of an IRRRL. On an IRRRL, your new term cannot be more than 10 years longer than the original term of the loan, not to exceed 30 years and 32 days, of course. Where this can become problematic is when you’re wanting to refinance a 15-year mortgage to a 30-year: can’t be done with an IRRRL. The longest term you can refinance a 15-year mortgage to with an IRRRL is 25 years. With a cash-out or cash-in refinance, there are no such restrictions; you can refinance a 15-year to a 30-year or vice versa with no problem.
If you’re wanting to get cash-out on your refinance, most likely you’ll need to go with the aptly named cash-out refinance. An IRRRL does allow for an Energy Efficiency Mortgage to be added on, but EEMs are tightly regulated such that they money gotten from one must be used specifically for pre-approved energy efficient improvements on the home. No more than $6,000 is available on an EEM. EEMs are also available on cash-out refinances, along with the ability to take advantage of the equity you have in your home for any purpose agreeable to the lender. You can pay off credit card debt, purchase a new car, make an improvement to your home, or pay for your children’s college. Anything you can convince your lender is a worthy cause is open to you.
Talking a little bit more about consolidating debt, we really want to emphasize how big of an advantage this is. Some credit cards (especially ones that have a past-due balance), can have extremely high interest rates compared to your mortgage – it’s not unheard of for borrowers to be being charged 20% interest on some of their credit card debt. Taking equity out of your home to pay off that high-interest debt will make paying off your home take longer, sure, but will save you potentially thousands of dollars in saved interest. You should remember that auto interest rates are even lower than mortgages right now, so paying off your car with the equity in your home may not actually save you money, though it will certainly make paying bills less complicated.
Lastly, you can take advantage of a cash-in refinance to pay off a major chunk of principal in your loan. You can always make more than the minimum monthly payment, sure, but if you use a cash-in refinance to make a large lump sum payment, you can also refinance to a shorter term while still having a lower monthly payment. This can save you money because the amount of interest you pay is calculated on how much principal you have left – so if you have less principal left you’ll be paying less interest. This in turn lowers your monthly payment, which enables you to pay off more principal each month if you keep paying the same amount you did before the refinance.