VA-eligible borrowers whose priority is to own their homes outright or build equity more quickly may want to consider refinancing with a 15- or 20-year VA-guaranteed mortgage.
Are these high on your priority list for considering a VA refinance loan?
- I want to build equity in my home faster
- I want to repay my loan and own my home in less time
- I want to obtain a lower interest rate than can be obtained with a 30-year mortgage
A reduced term VA refinance loan may enable you to cut your mortgage duration by as much as half. When market conditions are right, a VA-eligible borrower can reduce the amount of time it takes to build equity in the home and even own the home outright faster. Using the VA refinance program, a 30-year mortgage can be reduced to 20 or even 15 years.
Reducing the term of a mortgage typically leads to higher monthly payments. However, when interest rates are low, the switch from a 30 to a 15-year mortgage can be less drastic than many may think. Consider each of these examples of $250,000 mortgage amortizations:
- 30-year loan at 7% = $1,663 monthly or total of $598,772 over time
- 15-year loan at 5% = $1,977 monthly or total of $355,857 over time
Surprisingly, at just 2 interest points lower, a 15-year mortgage at 5% can cost an existing 30-year borrower at 7% just over $300 more per month. The savings, when one considers the total payments over the duration of each mortgage, can be astounding. The 30-year borrower making minimum payments at 7% could end up paying nearly $250,000 more over time than the 15-year borrower at 5%. That’s a quarter-of-a-million dollars! The benefits gained by refinancing to a lower term can vary based on individual loan characteristics. Taxes and insurance are not included in these examples.
Going from a 30- to a 15-year mortgage is not for everyone. Borrowers should always consider the costs to refinance and make sure they can afford a potentially higher monthly payment before making the adjustment. Borrowers with current 30-year mortgages at higher interest rates may stand to benefit the most from a reduced term at a lower rate. Other advantages to VA refinancing can include:
- Up to 100% loan-to-value
- No private mortgage insurance
- No prepayment penalties for early payoff
Watch for our next article in this series about the VA refinance program.
More information about VA refinancing with a federally-backed military home loan, talk with a seasoned VA mortgage professional.