Qualified borrowers may be able to reduce the length of their mortgages, save money in interest, and even get low monthly payments through the VA refinance program.
Have you considered whether now is be the best time to use the VA refinance program to get a shorter-term mortgage loan? Interest rates are still quite low, and more and more homeowners are trading in their 30-year loans for 15- or 20-year mortgages. Shorter term VA refinance loans in today’s market can help borrowers reap more than just the obvious benefit of reducing their interest rates.
In some cases, the interest rate reduction is enough that borrowers are also enjoying a reduction in monthly payments at the same time. Generally, when refinancing from a 30-year loan to a shorter term, a borrower can expect a higher monthly payment, but it’s not always so. Many borrowers are surprised at how low their monthly mortgage payments can be after refinancing to a shorter-term VA loan in today’s lending market.
To demonstrate, consider a hypothetical 30-year $200,000 mortgage at 5.5% obtained five years ago in 2008, hypothetically refinanced in 2013 to a 20-year VA mortgage at 3.5%. The comparison might look like this:
- 30-year loan at 5.5% = $1,074 monthly and $186,512 in interest over time
- 20-year loan at 3.5% = $1,063 monthly and $71,855 in interest over time
Because the example loan was five years old, the principal would now be $183,349. This is the amount that would be refinanced at the August 2013 current average rate of 3.5% for 20 years. As you can see, not only is the interest paid over time significantly less for the 20-year loan, but the monthly payments would be reduced as well. A borrower in this case would have already paid $48,841 in interest after five years. Even so, the refinance to a shorter term still saves over $65,000 in interest.
Mortgage payments, including interest, are amortized over the length of the loan. For 30-year loans, interest is calculated over 360 months. For 20-year loans, it’s 240 months. Therefore, those with shorter-term loans pay less in interest, even if they have the same interest rate. See the example below:
- 30-year loan at 3.5% = $123,312 in interest over the life of the loan
- 20-year loan at 3.5% = $78,381 in interest over the life of the loan
A borrower may be able to save a small fortune in interest over the life of a shorter-term loan. Borrowers whose current 30-year mortgages have interest rates offered a few years ago may stand to benefit the most from a reduced term VA loan at today’s rates. For many, the interest savings associated with shorter-term mortgages is reason enough to consider this VA refinancing option.
For more information about a reduced-term VA refinance loan, contact an approved VA lender.
Veterans First is a trade name of Wintrust Mortgage, a division of Barrington Bank & Trust Company, N.A., a Wintrust Community Bank. I NMLS# 449042 I Equal Housing Lender