With inflation trending down and the economy cooling, the Federal Reserve cut its benchmark interest rate 0.50% (50 bps) during its mid-September meeting and perhaps will make additional cuts by the end of the year. While changes to the federal funds rate don’t directly impact mortgage rates (which depend largely on the 10-year Treasury yield), the two rates often move in the same direction.
For some homeowners, especially those who took out a purchase mortgage while rates were in the 7% range, interest rates in the 6% range create an opportunity to refinance their loan to reduce their monthly payments. Even a small reduction in your interest rate can translate to tens of thousands of dollars in savings over the life of a 30-year mortgage loan. (In fact, many AAFMAA Members may have already received an offer from AMS that they’ve been pre-qualified to refinance their loan!)
To discuss the pros and cons of refinancing this fall, we spoke with Kevin Crooks, AMS Business Development Manager, for his insights with a particular focus on VA Home Loans.
Related: Marine Veteran Uses Cash-Out Refinance to Save $200 a Month
AMS: What are the benefits of refinancing a VA Home Loan now?
Kevin Crooks: We’ve analyzed our loan data and identified several Members who could lower their monthly mortgage payment through refinancing their existing VA Home Loan with a streamline refinance, also called an Interest Rate Reduction Refinance Loan (IRRRL). With an IRRRL, there’s no home appraisal required or income verification needed.
However, you must wait 6-7 months after your purchase before using an IRRRL, and you must have a recent history of making mortgage payments on time.
There’s also a cash-out option for conventional, FHA or VA Home Loans that allows you to pay off your existing mortgage with a new mortgage and get some cash back, while leaving some equity in the home. The exact amount you can take out depends on the type of loan you’re using. With a conventional loan, you need to leave 20% equity in your home. FHA loans allow you to leave just 20% equity, but you’ll have to pay mortgage insurance premiums. Finally, many VA lenders cap the maximum loan amount at 90% of the value of the home. However, under new VA guidelines, if the loan meets certain requirements, you may be able to borrow up to 100% of the appraised value.
Related: Cash-Out Refinance vs HELOC – Which Is Right for Me?
AMS: What are the costs for homeowners who refinance?
KC: With a VA Home Loan, there can be a lot of variance in closing costs depending on which state the property is located in. Both title insurance and transfer tax fees, if applicable, can vary by thousands of dollars between states. Also, as you may remember if you used a VA Home Loan to purchase your home, 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, as determined by the VA. Your monthly savings will depend on the size of your loan. For example, a .5% reduction in rate on $100,000 is $28, while on $400,000 the savings is $114.
AMS: Is it worth refinancing to save $100 a month?
KC: That depends on a few things. If the new loan would cost you $3,000 in closing costs, it would take 30 months (or 2.5 years) to break even. After that, you’d start seeing net savings. So if you planned to stay in your house more than 2.5 years after you’ve refinanced, it might be worth refinancing now to save that $100 per month.
In a lot of instances, a lender will be quick to highlight the savings without fully educating you 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 Home Loan refinance. Then they’ll show you a few examples to help illustrate the cost-benefit analysis. We will always take the time to help you determine if refinancing now is a good financial move for you. Our refinancing calculator can help you get a good idea of your potential savings.
Related: Saving $250 Month with a VA IRRRL Streamline Refinance
AMS: Aside from closing costs, are there other downsides?
KC: One downside of refinancing for some homeowners is that the loan term (how long you’ll be making monthly payments) starts over. However, this might not matter to you if you plan to move before the loan is up in 20 or 30 years (which most homeowners do).
AMS: Does refinancing impact my credit?
KC: When you refinance, typically a lender will check your credit using a “hard 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) and they’re counted as a single event, so the effect on your credit should be minimal.
So, if you have a VA Home Loan and could start saving $100 a month at no expense to you, it makes sense that you would want to do that.
Note: AMS is currently offering a promotion so AAFMAA Members can move forward with a purchase loan and refinance when rates drop with no additional fees — a value of $1,500. If you’re in the market to buy or purchased when rates were higher than they are now and this applies to you, please let us know!
We’re Here to Help
Whether you’re thinking about buying, ready to start home-shopping in earnest, or considering a refinance, an AMS Military Mortgage Advisor will be happy to provide you with an honest and fair comparison of your mortgage options, including a wide range of affordable mortgages designed to meet your needs. Ensuring AAFMAA Members obtain the best mortgage possible is our mission. Get your free mortgage assessment today or give us a call at 844-422-3622!