When mortgage rates hover at record lows, Members may find themselves wondering, “should I refinance? What are the pros and cons?”
Some Good News
If you have a conventional mortgage — one backed by Fannie Mae or Freddie Mac — you might be able to refinance immediately after closing on your home purchase or a previous refi. Keep in mind that many lenders will have a six-month waiting period regardless of your loan type.
Refinancing Government Loans
The rules are a little different if you have a government-backed mortgage, which includes VA, FHA, and USDA loans.
With a VA Loan, you have the benefit of being able to use a streamline refinance, also called an Interest Rate Reduction Refinance Loan (IRRRL). “With an IRRRL, you can provide minimal documentation and it doesn’t require a home appraisal,” says Fay B. Silverman, AAFMAA Mortgage Services (AMS) Branch Manager in Virginia Beach.
However, you have to wait six to seven months after you purchase or refinance before using an IRRRL, and you must have a recent history of making mortgage payments on time. Plus, with a VA Loan, 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 hundreds of dollars between states. Also, your VA Purchase loan included a VA funding fee of up to 3.3% of the loan amount – so you’ll want to factor that into your decision as well. The funding fee on a VA IRRRL is 0.5%, which the VA will waive if you have at least a 10% VA disability rating.
Important Refi Questions Answered
Here are a few things to know about refinancing that could save you money each month, help you move to a more favorable loan product, or shorten the length of time it takes to pay off your loan.
1. How often can you refinance your mortgage? You can refinance as many times as it makes financial sense to do so. The only caveat is that you might have to wait six months from your most recent closing (whether it was a purchase or previous refinance) to do it again.
2. Is it worth refinancing to save $100 a month? That depends. Say you’re refinancing to save $100 per month, but the new loan will cost you $3,000 in closing costs. It would take 30 months (or 2.5 years) to break even with what you spent to refi. After that, you’d start seeing net savings. So if you planned to stay in the house more than 2.5 years after your refi, it might be worth refinancing now to save $100 per month.
3. What is the downside? Aside from the closing costs, one big downside of refinancing your mortgage is that the loan starts over. Unless you can afford a shorter loan term with a bigger monthly payment, there’s a good chance you’ll be paying it off — with interest — for a longer time. However, this might not matter to you if you plan to move before the loan is completely paid off (which most homeowners do).
4. Will refinancing hurt my credit? When you refinance, the lender checks your credit using what’s known as a “hard credit pull,” which can knock a few points off your score. However, you can get quotes from multiple lenders within a “reasonable shopping period” (2-4 weeks) without an impact to credit points. “All credit inquiries during that time should be counted as a single event, so the effect on your credit will be minimal,” says Silverman.
5. Can I refinance if my loan was in forbearance? During the COVID-19 crisis, a lot of temporary changes are going into effect around mortgages and credit. On May 19, 2020, Fannie Mae and Freddie Mac released a statement saying that they will accept loans from borrowers who received a forbearance or other loss mitigation in the prior 12 months provided they’ve repaid the skipped payments and have paid their mortgages on time for three consecutive months. “The VA has yet to issue its guidance but we anticipate it will be similar,” says Silverman.
These complex issues are critical to discuss with your licensed AMS Military Mortgage Advisor before moving forward with your refi. We can offer unbiased advice and recommendations as well as an honest and fair comparison of your mortgage options, including a wide range of low-rate and low-cost mortgages designed to meet your needs. Ensuring you obtain the best mortgage possible is our mission. Call us at (877) 387-6856 or use our online form to get your free mortgage assessment today!