When to Refinance
When it comes to refinancing, timing is everything. Okay, maybe not everything, but it is a huge factor. For example, if you refinance before you have enough funds to adequately cover a second round of closing costs plus your other bills, then you could be putting yourself in a worse situation than you were in before. On the other hand, snagging a refinance at just the right time could give you a enviably low interest rate and would save you hundreds or even thousands on your loan. Everything you need to know about when to refinance is right here.
Do You Qualify for a VA Refinance?
First things first. Lenders will not approve you for a refinance if you don’t qualify, so this is the first point to check off your list. No matter how much a refinance might help you in your current situation, if you do not meet certain qualifications, now is not the time to refinance. Qualifications include credit score, debt-to-income ratio, and amount of equity. We cover loan qualifications extensively in other articles, but know that Low VA Rates is extremely flexible when it comes to qualifying. We have no minimum credit requirements, and we try to help any borrower that we can.
What Are Your Needs?
Even if you qualify with flying colors, knowing when to refinance largely depends on your situation and what your home needs are. If you have enough funds to pay your mortgage off earlier than you originally planned, it may be time to refinance into a different term. If you need a little more financial wiggle room each month, it’s probably time to refinance into a lower rate. But should you refinance your home? Knowing when to refinance is just as important as knowing when not to refinance. Take some time to ask yourself a series of mortgage and financial-related questions to determine what your homes needs are. It’s important to also recognize that what’s best for your home finances might not fit into your larger-plan finances. Here are some questions:
- When do I plan on moving out of my current home (if at all)?
- Can I afford larger payments or am I struggling to make current payments and instead need smaller ones?
- Is my current interest rate higher or lower than national averages?
- What other debts do I have besides my mortgage and what is most important to pay off first?
- When do I want my house to be completely paid off?
- Will any large expenses arise in the next few years?
- What is my credit score and debt-to-income ratio?
- How much equity do I currently have?
The Refinance Breakeven Point
The breakeven point is the point at which you recoup all the closing costs you paid. You find it through dividing total closing costs by your monthly savings. So, for example, if you paid $2,500 in closing costs but also save $100 a month with the house refinance, then you would break even after 25 months (just over 2 years). After that point, you would just be saving money.
So how does the breakeven point relate to you deciding when to refinance? The biggest factor is how long you intend to stay in your home. If you plan on moving out of your home before that breakeven point, it’s probably better to just stay in your current mortgage. In this situation, you would be paying more money than you would save if you were to refinance then.
In addition, guidelines for the VA IRRRL require you to reach your breakeven point within 36 months. If it will take you longer, a lender is not allowed to give you the loan.
Categories of Refinances
The type of refinance you choose to do will largely determine how much you save over time (though some aspects of this cannot be predicted), and some refinances will not fulfill your needs while others will. Here are the 2 major types of refinancing: rate-and-term refinancing and cash-out refinancing. In rate-and-term refinancing, you are changing the interest rate that you have and/or the term. This is the best type of refinance for paying off your mortgage quicker and cheaper. In a cash-out refinance, you usually refinance to a lower rate while also taking out more money that you can use to pay off other bills and expenses besides your mortgage. This is perfect for getting ahead on other debts, but it doesn’t usually save you as much money on your mortgage.
Within each of these broad categories of refinances are many subcategories of refinances that are tailored to specific needs that borrowers might have. For example, the VA streamline is a rate-and-term refinance that is designed to be the quickest refinance option, and it comes with a variety of interest plans, including fixed rates and hybrid ARMs.
Types of VA Refinances
- No income or credit verification (this information is taken from your previous loan)
- No appraisals (also taken from previous loan)
- VA-to-VA loan (must be refinancing a current VA loan)
- Possible to finance closing costs into loan amount
- Cannot get cash out
- Lower rate
- Lower rate
- Up to 100 LTV
- Flexible requirements
- No PMI, but you must pay the VA funding fee unless you’re disabled due to military service
- Can refinance from any loan into a VA loan
In order to qualify for a VA refinance, you need to be an active or a veteran military service member. You will need to obtain a COE (Certificate of Eligibility) in order to prove you served for an adequate amount of time.
How Term Affects Your Refinance
Some borrowers get the idea that having lower payments is always favorable, but that isn’t always the case. In fact, taking larger payment in order to shorten your loan term will save you thousands of dollars in interest, and you’ll be free of your mortgage several years earlier than you planned. Take a look at this example:
- James currently pays $948 in mortgage each month with a 25-year mortgage and 3 percent fixed interest rate. If James never refinances, the annual cost will be $11,380 and he will end up paying $84,530 just in interest over the course of his 25-year loan. But if he were to refinance into a 20-year loan with the same rate, he would be making monthly payments of $1,109 and would end up paying $13,310 each year and $66,210 just in interest over the course of the 20-year loan.
Term: 25 years
Interest rate: 3 percent
Monthly payment: $948
Annual payment: $11,380
Total interest: $84,530
Term: 20 years
Interest rate: 3 percent
Monthly payment: $1,109
Annual payment: $13,310
Total interest: $66,210
As you can see in the example above, James would have saved over $18,000 just in interest by refinancing to a shorter term. When it comes to changing terms, the key here in knowing when is it good to refinance a mortgage is determining whether it’s more important for you to have lower monthly payments right now or to save money overall.
Equity in Home Mortgages
Homeowners today often need to have excellent credit, excellent income, and excellent equity. But how does equity affect when to refinance your house? If you have a conventional loan, the amount of equity you have built up will affect whether or not you need PMI (private mortgage insurance). For example, having 20 percent equity will exempt you from having to pay PMI in most cases. But if you do have to pay PMI, this may offset the savings you would get. It’s also important to note that some lenders may not approve a borrower for a refinance if they are upside-down in their mortgage. Simply speak with a variety of lenders in order to know if your situation fits into a program they offer.
The amount of equity you have in your home will also affect how much extra you can borrow in a cash-out refinance. In a VA cash-out refinance, you can, depending on the lender, borrow up to 100 percent LTV (minus any closing costs you want to finance into the loan). That means that if you have $20,000 in equity on a $200,000 home, your refinance could give you $20,000 as cash in your pocket to pay off other expenses, as long as you are willing to pay the closing costs up front.
Refinancing Closing Costs
Closing costs for a refinance can amount to a few thousand dollars, making closing costs one of the main reasons why homeowners hesitate to refinance. Like discussed above, an early breakeven point could make paying closing costs worth it because of the amount you would save. Let’s take a look at the typical closing costs you would pay in a VA refinance:
- Discount points
- Origination fees
- Credit report fees
- Appraisal fees
- VA funding fee
- Escrow fees
- Title examination fees
Your lender may not require you to pay some of these fees while other lenders may tack on their own fees. Of course, with VA loans, it is possible to roll closing costs into the amount of your loan, so you don’t need to worry about paying anything extra at the time of the refinance.
Mortgage calculators are a helpful tool that can help you decide when to refinance. To get a visual of how much you would save with a refinance, mortgage calculators can be a big help. You plug in the numbers for your new loan (balance, rate, insurance, taxes, etc.) and the calculator will tell you your new projected payments and amortization schedule. The mortgage calculator is great for determining what to expect for each payment and each year if you were to pay off your mortgage early. It also helps borrowers decide whether an ARM will present enough savings to be worth the risk of fluctuating interest rates. If you’re unsure whether you should do a refinance, fiddle around with a mortgage calculator. Try lowering the interest rate or changing the term in your situation to see your projected payments and how much you could save.
Knowing When to Refinance and Getting Started
At Low VA Rates, not only do we help any borrower we can, we also offer solid mortgage advice on when to refinance, holding our borrowers’ best interests as the top priority. If you need to know more about refinancing, you can check out other articles on our blog. We cover everything from application requirements to closing costs to different types of loans. To get started on your refinance, call us now and we’ll help you through every step of the process.