Is now the right time to refinance your current VA home loan? Doing a breakeven analysis will help you decide if a VA refinance is right for your situation. Every month, we talk to thousands of military homeowners, and we have discovered the top reason we are told someone does not want to do a VA IRRRL is because of closing costs. Many have a fear of those closing costs, and they are not willing to take the time to understand how these closing costs actually work and what they are missing out on. In the video below, we will take a closer look at understanding the breakeven analysis and closing costs on a VA streamline loan. Keep watching this video to understand a little more about why you should be okay with closing costs.
Breakeven Analysis and Closing Costs on a VA Streamline
Veterans tell us “no” all the time. They are saying no to saving $15,000, $25,000, or even $100,000 or more. Either they don’t want those savings, or they do want to save all that money, but they don’t want to pay closing costs to do so. Let’s overcome those fears and take a closer look at closing costs.
At Low VA Rates, there have been times where we’ve been able to offer interest rates as low as 2.75% for a 30-year fixed loan for our military homeowners.
Interest rates are at an extremely low level right now. But thousands of veterans still tell us no every month. All of you veterans out there have the right to these very low interest rates because of your service, your hard work, and your sacrifice. Civilians like your neighbors and even other family members don’t even have the choice to take advantage of these benefits. So before you say no, remember that too many of us are not living our dreams because we are living our fears.
I know with a little bit of knowledge, you can at least overcome some of those fears. Just think for a moment about what you could do with an extra couple of hundred dollars a month. What could you do with thousands and thousands of dollars extra over time? We hear people all the time complain that if their mortgage payments weren’t so high they could upgrade to a nicer or newer home. With military clients, it’s all about family. Take a moment to pause this video and imagine what you could do for you and your family with all that extra money before closing the door on a refinance: travel, education, upgrading your home, paying off your bills, and getting rid of those credit cards that are holding you down. Another thing we hear all the time is “I just want to be able to breathe a bit easier. It’s like every single month I cannot catch up.”
The government is making it so easy for you to take advantage of this benefit. The number one reason people tell us that they want to do a streamline refinance is that they want a lower payment; they want to save money. Everybody has that in common. However, as you probably realize, the best way to lower your payment is to get a lower interest rate. So if you’re sitting at 4 percent today and I can put you at 3 percent, you’re going to lower your payment. On the other hand, if you already have a 2.75 percent rate (which is extremely low) and you still want to lower your payment to save money, you can also access the VA Hybrid ARM loan with only a 1.75 percent rate. So, lowering your rate saves you money and lowers your payment. Now you only have to decide if that’s something that you want to do. I’ll tell you that it’s fast, it’s easy, and we’re here to help you every step along the way.
Are Closing Costs Holding You Back?
Closing costs hold most of our clients back. So here is a quick table. Pause the video for a moment if you need to after I’ve explained this and look at this table further. Basically what you see here is every single low interest rate that we offer. The two lowest hybrid ARM rates and our two lowest 30-year fixed rates.
In order to know the exact closing costs that you would be charged with these rates, you would need to speak to your loan officer because these costs change every day. I’m assuming here that the loan balance is $225,000. If you’ve got a $500,000 balance, then you will likely have $20,000 in closing costs. Either way, you’ll see here that between payments there is a big fluctuation. However, all of these interest rates will probably save you money if your loan has an interest rate of 3.75% or higher today.
Here at Low VA Rates, we can save you money. You simply need to overcome this objection or fear of closing costs. What you’re leaving behind is $238 a month, almost $3,000 a year, and close to $100,000 over the life of the loan. Of course, I’m making some assumptions here that you have a 3.75% rate and that you’re turning down a 1.7% hybrid.
I’m hoping that the next couple of slides will bring all of this home for you. It is very important to understand what breakeven is and how to run it or understand the analysis that your loan officer runs. From there, you have to make a decision. Every loan has a breakeven point, and we’re going to show you how to calculate it. If you will still be paying your mortgage past the breakeven point, then there is no reason not to refinance because it wouldn’t make sense mathematically. There might be some emotional reasons or some family reasons, but overall, if you will still be in your mortgage by the time you hit your breakeven point, it is smart to refinance.
If math alone is not enough to help you make a decision, then remember all of the emotional reasons to refinance. We already understand why you don’t want to do it, but think about family, travel, education, and debt relief. All of these savings are waiting here for you.
The breakeven analysis formula is calculated in months and indicates the time in the future when you will have saved enough money from the refinance to have recovered or paid off all closing costs. Once you break even, everything else after that is money in your pocket. Here’s an example of a breakeven analysis:
Your current loan balance is $225,000, and the new balance that you get with us is going to go up because of closing costs. Your current payment is $1,042 of principal and interest payments. Your new payment with a 1.75% hybrid arm would be $804. With that change, you would save $238 a month and you’re breaking even in 42 months. To calculate the breakeven, you divide the cost of the loan by the amount of savings to get 42 months. Divide 42 by 12 to get the amount in years: 3.5 years. If you know you will be in the same house for longer than that, there’s no reason not to do a refinance and save that money every month.
It is possible to shorten your breakeven, or in other words, speed up the time it takes to recover closing costs by taking both the escrow refund and the monthly savings from the first few months and put it back into your loan. We sometimes see people breakeven in 8, 9, or 10 months. After that, they can pocket the $230 a month and save up to go to Disneyland or pay for sports uniforms and things like that.
Use the breakeven analysis calculator to help you make an educated decision. Remember that risk comes from not knowing what you’re doing. Please don’t say no to potentially saving thousands of dollars before you have calculated your breakeven and determined whether you will move before that point. Don’t discount what you can accomplish by saving $238 a month. Some people don’t breakeven for 300 months or 25 years from now, but the drop in monthly payments is enough to pay down credit cards that are at 18, 19, or 20 percent. Or it’s enough to pay off auto loans or student debt. So think about that. This makes it mathematically reasonable to refinance alone, and you know there are also a lot of emotional reasons why you might want to refinance.