Today’s topic is the pros and cons of refinancing with a VA Loan. Let’s look at the upsides and downsides and decide if refinancing makes sense for you.
PRO: Lower Payments via Lower Interest Rates
In general, why do people refinance? The number one reason is lower payments. Over the last couple of years, interest rates have generally trended down. The US Federal Reserve has been keeping interest rates low. When you can take a rate from a four or five percent range down to the two or three range you’re going to get lower payments via lower interest rates.
PRO: More Options (Loan Consolidation, Home Improvements, etc.)
What do we mean by “more options?” People refinance even when their payments go up, or even when interest rates go up. You may be asking yourself, “Why would they do that?”
Well, if you’re gonna do cash out, where you’ve got lots of student loans, credit cards, or auto loan that you want to consolidate so that you’re not paying American Express, then Visa, then MasterCard, and on-and-on. If you want to consolidate all that into one payment, you can do that through a cash out refinance.
As a matter of fact, VA loans have one of the best cash out programs available because you can borrow up to 100% of what your home is worth.
Let’s just say you have a home that appraises for $300,000 and you owe $250,000 on it. You can get $50,000 of your equity in the form of cash and do whatever you want with it. The VA does not put restrictions on it as long as you’re within 100% of the equity of your home. Most other programs that are not for veterans, non-VA loans, will not allow you to go and borrow 100% of what your home is worth.
Maybe you want to do home improvements. Maybe you want a better air conditioner. Maybe you want solar panels. Maybe you want to put in a swimming pool. You want to pull cash out of the equity that you have in your home. That’s another benefit of refinancing.
CON: Refinancing Fees
Now, let’s talk about the cons.
There are fees when you refinance. If you do nothing to your mortgage you’re not gonna incur any fees. If you go to refinance there’s title insurance. You may end up having to pay the VA funding fee again, unless you’re a disabled veteran.
These refinancing fees depend on the interest rate you’re trying to get and what state you live in.
CON: Risks (House Prices Fall)
There’s not a whole lot of risk in refinancing. The major risk would be a price fall in the housing market.
Let’s say your home appraises for $300,000, you owe $250,000, and you decide to pull out $50,000 worth of equity. Now you owe $300,000 on a home that you only owed $250,000 on beforehand.
You get the benefits we talked about above. The risk is, what happens if we have another recession and home prices plummet? What if your home is no longer worth $300,000? You still owe $300,000, regardless of the new (lower) appraisal price.
Anytime you refinance and pull equity out of your house, you run the risk of perhaps losing equity.
CON: Pre-payment Penalties
The final con we’ll look at is pre-payment penalties. This is historical stuff that’s not even that applicable these days. Very few loans, if any, have pre-payment penalties. The Government’s all but outlawed these and made it very difficult for banks to give you a pre-payment penalty. These are a thing of the past that helped create the housing collapse because people were not able to refinance when rates were going lower because they faced very large penalties. Slimy stuff.
If you have a pre-payment penalty, call a reputable loan vendor. If someone’s saying you can’t refinance because there’s a penalty, call a reputable loan vendor and have them analyze it and make sure it’s just not some sort of odd scare tactic that your old mortgage company is using to try to keep you on their books longer than they need to. Because very few people, if anyone, should have a pre-payment penalty today.
Hope you found the article helpful. In case you’re interested, here’s a video where we sourced some of this information, thanks to the folks at Low VA Rates.