When Is a Good Time to Refinance My Mortgage?
VA refinance loans offer benefits that just can't be matched by conventional refinances. With a VA refinance, you can lower your interest rate, switch from a non-VA loan to a VA loan, cash out on 100% of the equity in your home (minus closing costs you want to roll in), or take advantage of other benefits.
But timing your refinance right is an important part of making sure that it actually ends up benefiting you. Keep reading for some tips on how to know whether you should refinance or not.
Signs You May Be Ready for a VA Loan Refinance
Current Rates Are Lower Than Your Mortgage Rate
You may have heard different "magic numbers" regarding how much rates should drop before you should refinance—usually something like 1% or 2%. This, however, isn't always true.
The amount that rates need to drop to make refinancing beneficial for you depends on your loan. The larger your loan, the more money you'll save on monthly payments, even with just a small drop in rates.
Currently, rates are at historical lows, so if you got your loan when they were 4% or 5%, you might not want to keep waiting to see if they'll drop even lower. Though no one can say what rates will do, now could be the best time to take advantage of very low rates.
But rates aren't all you should consider. You'll want to make sure you'll actually be staying in the home long enough to recoup any extra closing costs from a refinance.
You Plan to Stay in Your Home for a While
Like with VA purchase loans, on a VA refinance, you have to pay closing costs. It can take a few years for savings on payments to make up for the amount you spend on closing costs, so you'll want to plan on sticking around for long enough to make refinancing worth it.
Once you talk to a loan officer and know what your expected closing costs are and how much it looks like you might save each month, you should be able to calculate your breakeven point. This is essentially the amount of time you need to stay in the home in order for your monthly savings to recoup the closing costs.
To calculate it, you simply divide the closing costs by your monthly savings. The answer you get is how many months you should stay in the home in order for the refinance to be worth your while.
If you already know you won't be in the home for that long, then you probably shouldn't refinance.
You're Switching from an ARM to a Fixed-Rate Mortgage
If you have an adjustable rate mortgage (ARM), you could benefit from switching to a fixed-rate mortgage.
Say you have an ARM that had a fixed rate for seven years, but now that the fixed period is over, the rate is starting to change from month to month or is increasing.
Whether you want the stability of a constant rate or you want to take advantage of locking in lower rates before they rise, a refinance can help you.
You Want to Switch from a Non-VA Loan into a VA Loan
If you currently have a non-VA loan and are paying mortgage insurance and a high interest rate, it may be beneficial for you to refinance into a VA loan.
With VA loans, rates are usually lower than those for conventional loans, you don't have to pay mortgage insurance, and you don't have prepayment penalties.
You Want to Cash Out on Your Equity
VA cash-out refinance loans allow veterans to both take advantage of lower rates and take cash out of the equity on their home. This money can be used for whatever you want, from student loans to car payments to a vacation with your family.
You Want to Consolidate Your Debt
You could benefit from using a VA cash-out refinance to transfer your debts from high-interest accounts (like credit cards) into lower-interest mortgage debt. This way, you may be able to save money on interest and enjoy the extra convenience of having your debts all in one place.
When a VA Refinance Could Be a Bad Idea
You Won't Be in the Home Long Enough to Make It Worth It
Since refinances require closing costs, you want to make sure that you plan on being around past the breakeven point, as we've already discussed.
This means that if you're planning on living in your home for 2 more years, but the monthly savings don't make up for the closing costs until 3 years down the road, refinancing will actually have a negative impact on your finances.
Current Rates Are Higher Than Your Rate
If current rates are higher than your mortgage rate, it is generally not a good idea to refinance. Switching into a shorter term or a fixed rate are exceptions to this rule of thumb.
The Bottom Line
In conclusion, it's a good idea to look at various aspects of your loan to make sure that a refinance is worth it.
There are unscrupulous lenders that may try to get you to refinance even when it doesn't actually save you money (and can even cost you). Be wary of unsolicited offers, making sure to compare offers from at least two or three lenders before you decide to refinance.
To take advantage of current rates and learn if you could save money on your loan, speak with one of our VA loan experts. At Low VA Rates, we specialize in VA loans, so we are familiar with the ins and outs of the VA refinance.
Get started online or give us a call today.