There are a lot of potential advantages to refinancing your mortgage. Often you can get a lower interest rate, resulting in lower monthly payments. Sometimes you can get what they call ‘cash out’ for improvements or repairs to the property, and can even adjust the length of the mortgage between 15 and 30 years. So refinancing can be a good idea in and of itself, but those advantages are augmented when you refinance into a VA loan.
A VA loan is a loan that is backed (guaranteed) by the Department of Veterans Affairs. One of the things that make a VA loan so great is the ability to refinance a non-VA loan into a VA loan so long as you are eligible for a VA loan. Refinancing into a VA loan can bring many other good changes into your mortgage. For example, VA loans do not require the usual mortgage insurance premiums for over 80% Loan to Value (an extra charge each month when you have more than 80% of the principal to still pay back, as “insurance” for the lender against the possibility of you defaulting). VA loans also do not penalize you for prepayment, which means that the sooner you can pay the money back, the better off you are. Having your mortgage through a VA loan also makes selling your home easier; if you sell to another VA eligible person, the VA loan can transfer directly to them.
The VA loan program was originally implemented in 1944 as part of the original G.I. Bill. VA loans were implemented to address the needs of servicemembers returning home from combat and needing to be able to buy a home. Over time, eligibility requirements for VA loans have broadened to include many more categories of people. Today, most who have completed a term of active service are eligible, though the length of the term of service depends on when the service took place. Generally, for post Vietnam-era veterans, the requirement is 24 months of continuous service or between 90 and 181 days of active duty. Veterans of the Vietnam era and earlier must have completed at least 90 days of active duty.
Veterans who were honorably discharged for reasons beyond their control, such as service-related disability, reduction in force or other reasons can have the term of service requirement waived. Some non-veterans are also eligible for VA loans. Current servicemembers can be eligible if they’ve met the 90 days of active duty requirement. Spouses of servicemembers can be eligible if their spouse is MIA or POW, or if their spouse was killed in action. Reservists and National guard members can be eligible after 6 years of service in their respective branches.
For those eligible, the VA loan is insured by the Department of Veterans Affairs, which can mean that the VA will insure up to 1/4 of the loaned amount in the event the borrower falls behind on payments. In recent years, approximately half of all VA-backed loans have been linked to a refinance. So if you’re looking to refinance your mortgage using a VA loan, these are some steps to follow:
1. Make sure you’re eligible for a VA loan. Most servicemembers or veterans who have served for a continuous 24 month period will be eligible for a VA loan.
2. Obtain a Certificate of Eligibility (COE). A COE is a document that proves you are eligible for a VA loan, and can be obtained through any VA approved lender. If you are refinancing from an existing VA loan to a new VA loan, you need not obtain another COE; your previous COE will carry over to the new loan.
3. Make sure the property you are wanting to refinance is eligible for a VA loan. There is an occupancy requirement for VA loans, which means that rental properties and vacation homes are generally not eligible. Some exceptions apply where the borrower is living in one of the plots of a multiplex and renting out the other plots, or when refinancing a mortgage for a home that was once lived in by the borrower but is no longer.
4. Calculate the closing costs. All of the “administration fees” associated with refinancing a mortgage need to be factored in. In the case of a VA loan, often the closing costs can be added to the loan amount, making it part of what is paid off each month. VA loans also tend to have fewer associated closing costs than traditional loans.
5. Finally, pick which VA loan you feel is appropriate for you. It is advantageous to shop around between VA approved lenders to make sure you’re getting the most appropriate loan for the most affordable price. Don’t sign up for anything you don’t fully understand.