Refinancing a Mortgage for Military Families
by Becca Stewart - March 22nd, 2022
Lower monthly payments. Saving tens of thousands in interest. Cash to tackle expensive home projects. Refinancing a home loan can seem like a no-brainer. But there are many factors to consider before signing on a new loan. We’ve compiled some of the most important do's and don’ts of refinancing a mortgage.
Reasons to refinance a mortgage
When interest rates fall or your home’s value rises, it can be tempting to refinance your existing mortgage. Homeowners choose to refinance their homes for several reasons:
Decrease or stabilize monthly payments
If your initial loan had a higher interest rate than the current market average, refinancing could reduce your monthly payment, sometimes by hundreds of dollars. Likewise, converting from an adjustable-rate mortgage to a fixed-rate mortgage will lock in your payment, meaning it won’t increase in the future.
Pay off a home mortgage in less time
Homeowners also refinance to convert to a shorter mortgage term. For instance, refinancing from a 30-year to a 15-year term means a larger monthly payment, but could save tens of thousands of dollars in interest over the life of the loan.
Leverage the home’s equity to pay off other expenses or make improvements
Some homeowners refinance their homes, using the existing equity to pay off expenses or invest in home improvements. Using home equity to pay off other debts can be risky. However, using the equity to make improvements can add to your home’s value, increasing the likelihood that you will recoup your investment.
Military families want to free up their VA entitlement
Military members can use a VA loan multiple times. However, there is a cap on how much you can borrow at any given time. This limit is known as your “entitlement.” You can restore your entitlement amount by selling a home and repaying your current VA mortgage. You can also refinance your home from a VA loan to a conventional loan, therefore fully restoring the amount you can borrow on another property with the VA loan. However, military members can only refinance a VA loan to a conventional loan once during their lifetime to restore the VA entitlement.
VA loan tips for refinancing a mortgage
Can I refinance a VA loan?
You can absolutely refinance a VA loan to lower your payments or free up the equity in your home. Typically, you will refinance your current VA loan using an interest rate reduction refinance loan (IRRRL), essentially trading one VA loan for another. Borrowers with an existing VA loan can use an IRRRL to reduce their interest rate, assuming current rates are lower than the initial loan. An IRRRL can also convert an adjustable-rate mortgage to a more stable fixed-rate loan. If you initially used a VA loan, you should not have any early payment fees associated with refinancing. Learn more about refinancing an existing VA loan through the VA website.
Can I convert a conventional loan to a VA loan?
If you purchased your home using a conventional loan, you might be able to convert that mortgage to a VA loan. This conversion isn’t common, and some stipulations apply. Talk to an experienced VA lender for more information. You can also read more about converting a conventional loan to a VA loan here.
The do's and don’ts of refinancing a mortgage
You’ve done the math and decided that refinancing is worth the cost. If the benefits and cost of refinancing outweigh the potential disadvantages, refinancing can be a financially savvy decision.
Before you pursue a new mortgage, there are a few tips for refinancing that you should keep in mind. Following these do's and don’ts of refinancing a mortgage can save you time and money in the long run.
What to do when refinancing your home
DO consider shortening the term of your loan
Converting a 30-year mortgage to a 15-year mortgage can drastically reduce the interest paid on the home over the life of the loan. The monthly payments will be higher, but if you intend to hold the property long-term, this option can save you tens of thousands of dollars over the life of your loan.
DO know what you can afford
Keep your monthly budget in mind (check the BAH calculator here if you need a reminder). While refinancing to a shorter-term mortgage means long-term savings, the higher payment might not be doable for you and your family.
DO check your credit score and improve if needed
If you have credit problems, missed payments, or any other financial hiccups on your record, refinancing might not be the best option. Check your credit score before refinancing and work to improve your score if necessary. Read more here bout credit boosting strategies for homeowners.
DO read your current mortgage to see if you have a pre-payment penalty
Some lenders include a pre-payment penalty. That is, if you pay off or refinance a mortgage before the loan’s term ends, you will pay an additional fee. If your current loan has this fee, factor that cost into your overall calculations.
DO shop around for lenders
Not all lenders are created equal. Different lenders offer different financing options. Ask about closing costs (including appraisal fees) and current interest rates. Military families should work with lenders well-versed in military lending programs, including VA benefits. Click here to find an experienced lender near you.
DO ask about lowering or eliminating appraisal fees
Most lenders require an appraisal of your current property before refinancing. If the home was recently purchased, the lender might consider using the appraisal from your initial purchase. Ask your lender if they will consider negotiating or waiving the appraisal fee.
DO have money in the bank for closing costs and other fees
Refinancing isn’t free. You can expect to pay between 2%-5% of the total loan amount in closing costs and fees when you refinance. Make sure you plan ahead and have money set aside for these expenses.
What NOT TO DO When Refinancing Your Home
Refinancing isn’t always a good idea. If refinancing puts you and your family in a financially precarious position, you may want to reconsider. Speak with a qualified, military-friendly lender who can help you understand your overall financial picture and make the best decision.
DON’T refinance if your existing loan is less than 0.5% above the current interest rates
In general, financial experts say that refinancing isn’t financially prudent unless owners will see a 0.5% or greater reduction in their overall mortgage interest rate. That’s because closing costs and other fees associated with a refinance can essentially negate the potential interest savings when below this threshold. Of course, all situations are different. Talk with an experienced lender to discuss your options.
DON’T create negative equity
If you are refinancing to free up the equity in your home, consider this decision carefully. If you’re borrowing against your home’s equity for reasons other than home improvement projects, you could end up with negative equity in your home. If home values decrease, and you have already borrowed against what little equity you did have, you will ultimately owe more on your home than it’s worth. When you sell the home, you will have to make up that price difference out of your own pocket.
DON’T refinance if you expect to PCS soon
If you are like most military families, another PCS is either on the horizon or right around the corner. Unless you keep your current property and rent it out when you PCS, refinancing might not be the best option for you. Refinancing comes with substantial closing costs, typically somewhere between 2%-5% of your overall loan. On a $200,000 loan, that could be upwards of $10,000. Let’s say that refinancing reduces your monthly payment by $250. It would take 40 months of reduced payments before reaching a break-even point. If you will be PCSing and selling the property in 24 months, refinancing doesn’t make financial sense.
DON’T open new credit accounts or make large purchases
If you plan to refinance—or you are even considering the possibility—hold off on making large purchases or opening new credit accounts. These actions will negatively impact your credit score. A lower credit score not only makes it more difficult to secure a loan, but also will result in a higher interest rate if you are approved.
DON’T refinance if it isn’t financially beneficial
Refinancing isn’t always the best option. Consider the costs and benefits of both refinancing and staying with your existing mortgage, then choose the option that makes the most financial sense.
How do I refinance my mortgage?
Refinancing your mortgage is a process. Start by talking with a qualified and knowledgeable lender who will lay out your options and answer your questions. If you decide to apply for refinancing, your lender will need bank statements, financial documents (including your most recent LES), and other applicable information before processing your loan. Refinancing can take several weeks to several months to complete.
Talk to a qualified military-friendly lender for more information about your refinancing options.
Becca Stewart is an Air Force Spouse, mother of two, freelance writer, and sufferer of Wanderlust. Originally from Colorado, she enjoys anything outdoors, especially if there’s snow involved. She is a travel fanatic, always looking for her next great adventure. As a full-time writer, Becca works closely with several nonprofit organizations and is a passionate advocate for human rights and military families. Learn more at writebecca.com.
