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Many homeowners in recent years are refinancing due to the real estate market’s record-low mortgage interest rates. Although rates are expected to rise, lenders currently offer loans for qualified buyers at approximately 4.2 percent interest, varying daily. Refinancing allows homeowners to reduce their monthly mortgage payments to save money both immediately and long term.
When homeowners are underwater on their mortgages, meaning they owe more on their loans than the depreciated value of their homes, then refinancing is an absolute benefit. Additionally, refinancing assists homeowners who borrowed loans at steep interest rates. Homeowners should calculate whether refinancing is cost-effective by comparing the refinancing fees against the remaining costs of their mortgages.
The types of loans homeowners originally borrow to purchase their homes dictate the refinancing options available to them. Along with popular conventional and Federal Housing Administration (FHA) loans, veterans can purchase homes with Veterans Administration loans (VA).
VA loans are backed by the U.S. Department of Veterans Affairs and funded by private lenders. Veterans, military service members and their surviving spouses can apply for eligibility. VA loans are advantageous for buyers with low credit or no down payments, offering savings on the upfront costs of buying homes. However, some veterans elect alternative loan programs.
Here are three types of loans and their corresponding refinancing options.
Conventional Home Loans – HARP
Conventional loans are backed by government-sponsored enterprises Fannie Mae and Freddie Mac, and are the most commonly refinanced loans. Veterans with 20 percent down payments are more likely to select conventional loans to avoid private mortgage insurance (PMI), an extra monthly cost that protects lenders if borrowers default on their loans. The Home Affordable Refinance Program (HARP) was designed in 2009 to help underwater conventional loan holders refinance at lower interest rates. To apply for HARP, homeowners must be current on their mortgage payments without any late payments in the past six months and no more than one 30-day late payment in the last 7-12 months. Applicable conventional loans must be conforming; in most continental U.S. states conforming loans are $417,000 or less.
Conventional loan refinancing requires homeowners to pay for an appraisal to determine the current market value of their homes. Once home values are determined, refinance lenders require borrowers to have 20 percent equity in their properties, also known as 80 percent loan-to-value (LTV). Borrowers with less than 20 percent equity, who assume PMI, are allowed refinancing with 5 percent equity also called 95 percent LTV. Lenders also verify borrowers’ employment, requiring employment history for the past two years and credit scores of at least 620.
FHA Home Loans – FHA Streamline Refinancing
Veterans might have FHA loans if they purchased their homes as civilians, but most homebuyers without 20 percent down opt for VA loan programs. FHA loan holders are not eligible for HARP, but can pursue FHA streamline refinancing. This refinancing option allows homeowners to reduce their monthly mortgage payments by 5 percent at a minimum. Homeowners who completed an FHA refinance in the past are eligible for a second as long as their payments decrease by 5 percent. Additionally, adjustable-rate mortgages (ARM) typically begin with low interest rates for a specific period of time and then transition into steeper rates throughout the later years of loans. FHA streamline refinancing allows ARMs to refinance into fixed-rate mortgages where rates are solidified throughout the life of loans.
FHA streamline refinancing offers an appraisal method or a no-appraisal option. The FHA appraisal determines the maximum loan amount. Although FHA appraisals are not mandatory for no-appraisal refinancing, lenders typically require conventional appraisals to protect their investments. FHA streamline refinancing does not require income verification or a specified credit score, though individual lenders usually have credit score guidelines. Lenders review loan payment history and offer the lowest interest rates to borrowers with the least risk.
VA Home Loans – VA Streamline Refinancing
Many veterans take advantage of VA loans when they initially purchase their homes to sidestep the down payment, PMI and penalties for loan prepayment while limiting closing costs. Veterans with VA loans hoping to reduce their monthly payments are eligible for VA streamline refinancing, also known as Interest Rate Reduction Refinance loans. This refinancing option provides VA loan borrowers low interest rates, reduced funding fees and lenders credits to apply toward closing costs.
VA refinancing, like FHA refinancing, does not require an appraisal, income verification or specified credit score. However, lenders can apply credit score boundaries and conventional appraisal requirements as terms of their loans. These borrowers must be current on their mortgages with no more than one 30-day late payment within the past year. Additionally, they must assume these properties as their primary residences.
VA Cash-Out Refinance
Veterans interested in refinancing to convert their home equity into cash can apply for VA cash-out refinancing. This refinancing option is available to veterans holding either conventional or VA loans. Civilian cash-out programs exist, but most veterans opt for VA cash-out plans because they offer the lowest interest rates, longest payback periods and 100 percent of property value in cash – or 100 percent LTV. Applying for a VA cash-out refinancing loan includes the same benefits and disadvantages of a traditional VA home loan.
Veterans unable to make their loan payments should contact their loan servicers to discuss payment assistance programs designated by the U.S. Department of Veterans Affairs. Alternatively, veterans are provided with some of the most cost-effective loan programs on the market and those considering refinancing should shop for lenders offering the lowest rates.