VA Vs. Conventional: Refinancing Your Loan
Despite popular belief, the process of deciding which loan program to go with shouldn’t stop at comparing interest rates. While interest rates are very important, and the VA loan program wins that fight, there’s more to it than just interest rates. One of the factors that many borrowers fail to internalize is their ability to refinance their loan once they have it. Since both conventional and VA loans offer the ability to refinance a loan, we’re going to compare the different options you have when refinancing within each program and the advantages and disadvantages of each one.
Quickly, we’re going to go over how refinancing works. When comparing a new purchase with a normal refinance, there’s not much difference on your end. It is a bit simpler in terms of paperwork, but you still have to have the home appraised again and you have to go through the same credit qualifying and employment/income verification that you went through on the original loan. There really is very little practical difference between a new purchase loan and a refinance, since most of the stuff that happened with the seller happened on their end. If you are expecting refinancing to be a walk in the park compared with a new purchase loan, prepare to be disappointed. That being said, there are some ways you can try to make a refinance be better, depending on what loan program you are using.
Conventional refinancing includes closing costs similar to that of a new purchase loan, and they take almost as long to conduct. You can get cash out on a refinance if you have enough equity in the home to do so, but that’s it. You can’t really get cash out on the loan in any other way. Many banks that offer conventional loans offer a streamline refinance option, which is intended to be quicker and easier than a standard refinance. These streamline refinances are all very different; some may require appraisals while others do not, and some may be faster than others or require less underwriting than others. You might happen upon one that’s almost as good as the streamline refinance that the VA loan program offers standard, but the chances are not good. We’ll talk more about how advantageous a good streamline refinance can be in the context of the VA’s streamline option, since that’s where most of the advantages come to light anyway.
The VA loan program also has a normal refinance (commonly called a cash-out refinance, even if no cash is taken out). The VA cash-out refinance is very similar to the conventional, but it comes with one really nice feature: the Energy-Efficient Mortgage (EEM). The EEM is an add-on that a borrower can get with their refinance to make energy-efficient improvements to their home. The normal limit is $6,000, but even more can be obtained if there is justification. More importantly, however, the VA has the Interest Rate Reduction Refinance Loan (IRRRL), which is their streamline refinance option. The IRRRL comes with a host of benefits. Closing costs are significantly cheaper than on a normal refinance, no appraisal is required, nearly all of the underwriting information is taken from the original loan, and the refinance can be done from start to finish in as little as 10 days. Even better, on an IRRRL you can also get an EEM, where on conventional refinances you can’t get any money out of a streamline refinance. On the VA streamline refinance, you are not able to get equity out on the home, but you can still get an EEM to make energy-efficient improvements to your home. The IRRRL is far superior of a loan product than anything you’ll be able to find on the conventional market.
And thus concludes our multi-article comparison of the VA loan program and the conventional loan program. We may add more articles to the series sometime in the future, but for now all of our bases seem to be covered. As always, if you have any questions let us know in the comments or reach out to us via phone or our website.