You could be losing thousands of dollars on your home loan

Refinancing a VA loan may offer Veterans a powerful option to lock in a lower interest rate, refinance a non-VA loan into a VA-backed loan, and/or get cash back from the equity they have in their home. Veterans can save hundreds of thousands of dollars over the life of their loan with an interest rate reduction or get up to 100% of their home equity in cash to be used for items such as home repairs, college tuition or to consolidate high-interest debt.

As with every financial decision, there are pros and cons, and VA wants Veterans to understand all of their options before making any financial decisions like refinancing their home loan.

VA Refinancing option #1: IRRRL

When interest rates are lower, Veterans often take advantage of VA’s Interest Rate Reduction Refinancing Loan (IRRRL). IRRRLs are popular because they can refinance a VA-guaranteed home loan to obtain a lower interest rate, lower monthly mortgage payment or refinance an adjustable-rate mortgage (ARM) into a fixed-rate mortgage.

A key benefit of the IRRRL is how much money you can save over the life of the loan by refinancing into a lower interest rate. Amortization math and graphs can help you see the savings you can achieve. You can also finance most closing costs into the loan amount, which means you typically do not need cash on hand to take advantage of lower interest rates. IRRRLs also typically do not require underwriting for the majority of these loans, and if you’re a Veteran in receipt of VA service-connected disability (or otherwise exempt), you will not be charged a VA funding fee.

If a Veteran purchased a home for $400,000 with a 30-year loan term and a fixed rate of 6.5%, the principal and interest payment would be around $2,528 per month. If the Veteran can take advantage of an IRRRL to reduce the interest rate to 5% (keeping the new IRRRL loan amount the same, at $400,000 with a 30-year loan term), their new principal and interest payment would decrease to around $2,147 per month. This would equate to a savings of $381 each and every month, just by reducing the interest rate.

VA Refinancing option #2: Cash-Out

With the VA Cash-out loan, Veteran borrowers can use this option to access cash up to the amount of their entire home equity. The lump sum of cash can be used for many purposes, like home improvements, paying off debt, children’s education or emergency expenses. Veterans who currently have a non-VA home loan (for example, a conventional loan) can also refinance into a VA-backed home loan and take advantage of traditionally lower interest rates and other important benefits that come along with having a VA-guaranteed home loan. VA cash-out refinance loans typically do not require cash at closing from the Veteran and allowable fees/closing costs may be paid from loan proceeds, which helps reduce or eliminate any amount due from the borrower at closing.

Do your homework when it comes to refinancing

Veterans should proceed with caution when refinancing a VA home loan.

Shop around: VA does not set the interest rate that lenders must offer borrowers. This means it is lender-, borrower-, and market-determined and may vary from one lender to another. Veterans should shop around to find the lender that offers the best loan terms that fits their needs.

Closing costs: Refinancing isn’t free; the lender will charge additional closing costs, which can add up to thousands of additional dollars. This can include the VA funding fee (unless the Veteran is service-connected/exempt), lender and brokerage fees, title fees, etc. In many cases when doing a VA refinance loan, the Veteran can finance allowable closing costs into the loan amount, but keep in mind that this will increase the loan balance and therefore will incur additional costs in the form of interest over the life of the loan.

Amortization restarts: A refinanced loan is a brand-new loan, with the old loan being paid off and a new loan starting with a new amortization schedule. This means that when the loan closes, you are restarting at 30 or 15 years, which means most of your initial payments will go to interest and only a small amount going to the principal. While you may save money on the monthly payment, Veterans should pay attention to how much their total loan paid amount (with interest included) will be at the end of the refinanced loan.

Unwanted lender advertisements: Because the VA home loan is facilitated by non-VA affiliated private lenders, they may provide your information to third parties that may then send you loan-related advertisements, potentially resulting in large quantities of mail, email, phone calls and text messages. Be wary of any unsolicited mail or phone calls you may receive after closing a VA-guaranteed home loan, as VA does not partner with any single lender to offer special refinance options. VA recommends Veterans reach out to multiple lenders to determine their specific company policy on sharing information with third parties. Veterans can also add their phone numbers to the National Do Not Call Registry or contact the Consumer Financial Protection Bureau (CFPB) for mortgage scam mail materials.

Cash-out cash back costs: For the VA cash-out refinance loan, the Veteran is typically adding the cash-out amount into the refinanced loan, which increases the loan amount and therefore the amount of interest paid over the life of the loan. For example, a Veteran does a VA cash-out refinance loan to receive $100,000 in cashback at closing. If the previous loan balance was $300,000, and they received $100,000 cash back, the Veteran will now have a $400,000 loan balance. This can lead to higher monthly mortgage principal and interest payments and thus paying well over the $100,000 lump sum over 30 years due to the interest on it. Veterans may wish to consult with a financial advisor prior to utilizing the VA cash-out refinance loan to ensure that this option is the best choice for their financial goals and current situation.

Too good to be true: Very rarely will a cash-out refinance lower your monthly mortgage payment, so if a lender tells you that they can get you a cash-out lump sum and lower your payment compared to the original loan, proceed with caution. The CFPB and the Office of the Comptroller of the Currency (OCC) have recently taken action against several banks for deceptive advertising and false statements targeting Veterans looking to refinance their VA home loan. If a Veteran believes that their lender is engaging in fraudulent practices, please contact VA Loan Guaranty Service and the VA Office of Inspector General to report the lender and end refinancing discussions at that time. Veterans should also contact the CFPB or OCC to report any misconduct.

Refinancing can reduce Veteran borrowers’ monthly mortgage payments or provide significant cash from the home’s equity, but Veterans should always do their homework to determine if the refinance is the best option. Please speak with a lender or reach out to a VA loan specialist by calling 1-877-827-3702 (Monday-Friday, from 8:00 a.m. – 6:00 p.m. ET).