By Kevin Crooks, Mortgage Loan Officer
Have you ever considered refinancing your home? Maybe you’ve wondered when would be the best time to do that. Many people assume that you must save a certain percentage for a refinance to be worth the effort. Some think that they must lower their mortgage rate at least 1% or 2% to justify the costs. While those questions and issues are worth thinking about, here’s what you should actually be focused on.
Analyzing Refinance Cost vs. Monthly Saving
In a lot of instances, a lender will be quick to highlight the savings without fully educating the borrower on the cost. A mortgage lender like AAFMAA Mortgage Services LLC (AMS) will start by exploring a few details about a refinance instead — specifically a VA Loan Refinance. Then they’ll show you a few examples to help illustrate the cost benefit analysis.
Refinancing a Conventional Loan
When refinancing a conventional loan, you go through a similar process as getting a mortgage to buy a home. There is not much difference in the qualification, process, and fees between a conventional purchase and a refinance. So it is quite possible that someone who originally qualified to purchase a home may not be able to refinance — if they retired with lower income, for example, even with a perfect payment history and the new payment being substantially lower.
Refinancing a VA Loan
The VA Loan, however, is quite different. The VA offers an Interest Rate Reduction Refinance Loan (IRRRL, pronounced “Earl”). The VA IRRRL is a streamlined refinance product and can only be conducted with a current VA Loan. The VA has tried to eliminate the barriers which may prevent a servicemember or Veteran from simply trying to lower their payment and improve their overall financial health. The IRRRL does not require an appraisal and the VA does not even require a new credit report, while most lenders require a credit report simply to ensure minimum credit score requirements. There is no income information provided and no income or asset documentation required. Besides a lender’s minimum credit score requirement, the only other qualification is a timely mortgage payment.
Is a Refinance for You?
When determining if a refinance is worth your time and effort, you will need to review your closing costs vs. your monthly savings. On the VA IRRRL, the closing costs do not have to be paid out of pocket; they can be included in the loan amount but they are still important to understand. There can be a big variance in closing costs depending on the state where the property is located. Both title insurance and transfer tax fees, if applicable, can vary by thousands of dollars between states. Also, as you may remember, on a VA Purchase loan, you may have been charged a VA funding fee on your mortgage at up to 3.3% of the loan amount. For the VA IRRRL, the funding fee is only .5% and is waived if you have at least a 10% VA disability rating. Your monthly savings will depend on the size of a loan. A .5% reduction in rate on $100,000 is $28, while on $400,000 the savings is $114.
Let’s Look at Two Examples.
Example 1: A $200,000 refinance lowering the interest rate from 4.75% by 1% to 3.75%, with total closing costs of $3,200.
The monthly interest savings would be $117 a month. The $3,200 closing costs divided by $117 a month in savings = a break-even of 27 months. That refinance would pay for itself in savings in 27 months and would be beneficial if the plan was to own the home for at least 3 more years.
Example 2: A $450,000 refinance with an interest rate reduction of 0.5% from 4.25% to 3.75% for a home in a low closing cost state with no funding fee would only total $1,800. The monthly savings is about the same at $116; however, the break-even point is at $1,800 divided by $116 = 15 months. This break-even is much shorter even though the percentage savings is 0.5% lower.
Although, determining if refinancing a home is the best option for you will vary on a case-by-case basis, it is important to work with a lender who will explore your individual savings and overall benefit. If you or someone you know is interested in refinancing a home, please contact AAFMAA Mortgage Services at [email protected] or 844-218-6926. We’d be happy to walk you through the process.
Use our calculators to help determine if refinancing is the best option for you.
Kevin Crooks is a Mortgage Loan Officer with AAFMAA Mortgage Services LLC. Kevin grew up in Jacksonville, North Carolina, at Camp Lejune while his father was serving in the Marine Corps. After graduating from Tulane University with a BA in Business Finance and Management, he started originating primarily VA loans in 2003.
Kevin currently lives in Wilmington, North Carolina. His passion is to serve the military community and provide them the best service possible with their mortgage. Contact Kevin Crooks at [email protected] or (703) 707-1083 or (703) 675-7286.
AAFMAA Mortgage Services LLC is an Equal Housing Lender and is a VA-approved lender not acting on behalf, in the direction of, endorsed or sponsored by the Department of Veterans Affairs or any government agency. This is not a commitment to lend or an offer and is for information purposes – Your actual rate, payment and costs could be higher. Not all borrowers will qualify. Get an official Loan Estimate before choosing a loan. This is for VA mortgages (refinance and purchase) only. NMLS ID # 1423968. http://www.nmlsconsumeraccess.org/. For further state licensing and disclosures visit www.aafmaa.com/mortgage. 639 Executive Place, Suite 203, Fayetteville, North Carolina 28305. 844-218-6926. Licensed Lender in Alabama 22416, Arkansas 116211, Colorado, Connecticut ML-1423968, Delaware 0243333, Florida MLD1376, Indiana 34842, Iowa MBK-2018-0075, Kansas MC.0025489, Kentucky MC401802, Louisiana, Maine 1423968, Maryland 22541, Nebraska, North Carolina L-167411, Oklahoma ML011430, Oregon ML-5730, Lender and Broker in Rhode Island 17050098480, Pennsylvania 61781, Tennessee 135339, Lender and Broker in Virginia MC-6685. Contact AAFMAA Mortgage Services LLC for current rates and a full Loan Estimate. This is not an offer and rates displayed may not be available at the time of rate lock. On May 2, 2019 rates and fees for a 30 year term, $200,000, VA fixed mortgage, with a 720 credit score, in the State of North Carolina were 3.875% with an APR of 3.997%. Loan to value is 100%. Principal Residence. Payment does not include taxes and insurance premiums. The actual payment amount will be greater. Some state and county maximum loan amount restrictions may apply. Payment is $940.47 (principal and interest only). No prepayment penalties. Not all borrowers will qualify. AAFMAA Mortgage Services LLC is a licensed mortgage lender located at 639 Executive Place, Suite 203, Fayetteville, NC 28305, NMLS # 1423968. Disclaimer date of 5/2/19. Disclaimer will be updated in the event promotional items occur or new licenses for AAFMAA Mortgage Services LLC are finalized.