The VA loan program was created in 1944 as part of the G.I. Bill to help current and former members of the U.S. military purchase homes. Today, more than 3.7 million veterans have a mortgage guaranteed by the U.S. Department of Veterans Affairs, or the VA.
If you have a VA loan, you may be interested in refinancing to lower your loan’s interest rate or borrow money against your home’s equity. We’ll review current VA mortgage refinance rates and discuss what it takes to qualify for VA loan refinancing.
Today’s VA refinance rates
VA refinance rates depend on various factors that include location, loan amount and credit score. Mortgage rates are the highest they’ve been in years, and the same is true for VA loan rates. The average VA refinance rate on Nov. 9, 2023 was 7.23%, up almost five percentage points from its 2021 low.
Mortgage rates tend to follow the 10-year Treasury bond, which was 4.49% in early November, according to FRED. In contrast, the 10-year Treasury was just 1.55% in late 2021.
Refinance rates tend to be higher than purchase mortgage rates, particularly for cash-out refinance loans. Given the recent upward trend of the 10-year Treasury, borrowers may be in for several more months of elevated VA mortgage and refinance rates.
Borrowing rates across a range of consumer products, including mortgages, are also up following a series of Federal Reserve rate hikes. By raising its benchmark interest rate, the Fed aims to slow the pace of inflation. But higher short-term borrowing costs can put pressure on mortgage lenders, causing them to impose higher purchase and refinance rates on borrowers.
The Fed may cut rates in the coming year as inflation continues to cool, which could drive mortgage rates downward. However, the direction of the 10-year Treasury could have a stronger influence on mortgage rates than the Federal Reserve’s benchmark rate. The yield on the 10-year Treasury is expected to fall in 2024, which could mean lower refinancing rates for VA loan holders.
How VA mortgage refinance rates work
Interest rates on VA loans are typically lower than on conventional mortgages. The average 30-year conventional mortgage rate was 7.50% on Nov. 9, 2023, compared to 7.23% on a VA loan.
Often, a VA mortgage refinance will result in lower monthly payments. But that depends on borrowing conditions and whether you’re taking additional cash out of your home’s equity.
For example, let's say you have 25 years and $200,000 remaining on your mortgage, with a current interest rate of 7.5% and a monthly payment of $1,398. Refinancing to a new 30-year, $200,000 loan at 7% would result in a monthly payment of about $1,331. Not only will you save a little each month, but thanks to the lower rate, you’ll save nearly $60,000 in interest over the life of the loan.
VA mortgage refinance rates depend on the type of loan. A cash-out refinance loan will generally result in a higher interest rate than a standard refinance, where you’re borrowing the same amount as your existing mortgage balance. Use a mortgage refinance calculator to determine whether refinancing makes sense.
Factors that affect your VA rate
In addition to economic influences like inflation, the rate you receive on a VA refinance is determined by several factors, including:
- Loan amount: The amount you intend to borrow can affect your interest rate. You may receive a higher rate if you’re refinancing a particularly large or small amount.
- Loan term: Most VA loans have 15- or 30-year repayment terms. While the rates on 30-year terms are competitive compared to conventional loans, 15-year rates tend to be even lower.
- ZIP code: Your state of residence can impact your VA loan rates. Use the CFPB’s online tool to explore average rates in your state.
- Credit score: The VA doesn’t specify a minimum credit score required to qualify, but generally, the higher your scores, the more creditworthy you appear. Most lenders require a score of at least 620, though some may work with borrowers who have scores as low as 500.
- Income: Your lender will review your income to determine your ability to repay the loan. The higher your income, the lower the perceived risk of default, so you’re likely to receive a lower interest rate.
- Type of refinance: Rates on cash-out refinance mortgages are typically higher than those on interest rate reduction refinance loans (IRRRLs).
Types of VA refinance loans
There are a few ways to refinance a VA loan. If your goal is to lower your interest rate or reduce your monthly payments, a streamline refinance (also known as an interest rate reduction refinance loan, or IRRRL) is generally your best option. Your new interest rate will depend largely on your credit score and market rates.
If your goal is to take cash out of your home’s equity, a cash-out refinance might be right for you. Since you’ll be borrowing more than your existing mortgage balance, you may receive a higher interest rate than with an IRRRL.
If you need cash to make home improvements, a renovation refinance may be best. Your new loan will include funds to cover the cost of home improvements, which must be made by a VA-registered contractor. Like a cash-out loan, expect higher rates on a rehab refinance.
Streamline refinance (aka IRRRL)
Refinance to a loan with new monthly payments
Must have an existing VA loan and be refinancing a loan for a home you live in or have previously lived in
Borrowers looking to lower their monthly payments or move from a variable rate loan to a fixed interest rate
Refinance to a higher amount than your current mortgage balance
Must meet lender’s requirements for credit score and income, and must continue to live in the home; both VA and non-VA loans are eligible
Borrowers looking to tap home equity for improvements or to consolidate debt
Refinance to a new cash-out loan that includes funds for renovations
Property must be your primary residence or one you plan to occupy after making renovations
Homeowners who want to make significant renovations to an existing home
Brian LaRue, president of Red Oak Mortgage in New Jersey, said that if you want to borrow cash from the value of your home, a VA cash-out refinance is typically a better option than a conventional mortgage refinance. “The VA allows up to 100% loan-to-value on a cash-out refinance, so you can take up to 100% of the equity in your home,” LaRue said. Keep in mind that withdrawing all of your home equity puts you at risk of becoming underwater on your mortgage (or owing more than the home is worth) and can limit your options for selling the home.
With mortgage rates currently elevated across the board, LaRue said an IRRRL doesn’t make financial sense for most borrowers. However, a cash-out refinance may be a good option if you have expensive, high-interest debts you want to consolidate.
“Even though the rate is going to be higher than it was two years ago, the programs available from the VA give you the opportunity to leverage the equity you've gained in your home and lower the effective interest rate you're paying on the total amount of your debt,” LaRue said.
Alternatives to VA refinancing
If you have a VA loan, you aren’t limited to a VA loan refinance. You can instead refinance to a conventional mortgage or FHA loan.
You'll typically need a minimum credit score of 620 and at least 20% equity in your home to qualify for a conventional mortgage refinance. With an FHA loan, you may be able to qualify with a credit score as low as 500, but keep in mind that you’ll receive higher interest rates if you have a low score.
If you need cash and have sufficient home equity, consider a home equity loan or line of credit (HELOC) instead. A home equity loan may be especially beneficial when VA refinance rates are high, since you can borrow a sum that’s considerably smaller than your total mortgage balance.
How to find the best VA refinance rates
Shopping around with multiple lenders is a great way to find the best VA refinance rate. When comparing offers, take note of closing costs and additional fees that might eat into your savings. To get the best rate on your refinance loan, you can also:
- Contact your current lender to see if you qualify for a lower rate. If you have a solid payment history, you may be able to negotiate a lower rate.
- Improve your credit scores. Paying all bills on time and reducing credit card balances can boost your credit scores. Lenders commonly reserve the lowest rates for borrowers with strong credit.
- See if paying points makes sense. Points are an upfront cost you incur to buy down your mortgage rate.
Eligibility requirements for a VA refinance loan
The requirements to qualify for VA refinancing depend on the type of loan.
To qualify for an IRRRL, you must:
- Already have a VA loan
- Use your IRRRL to refinance your existing VA loan
- Certify that you currently live in the home or once lived in the home
For a cash-out refinance, you must:
- Qualify for a Certificate of Eligibility by meeting minimum service requirements
- Meet a lender's income and credit requirements
- Continue to live in the home being refinanced
Pros and cons of VA loans
While the VA loan program has myriad benefits for military members and veterans, be sure to weigh the benefits and downsides before applying for VA mortgage refinancing.
Costs of refinancing a VA loan
When you refinance a VA loan, you'll be charged a funding fee similar to the fee you're charged when originating a new mortgage. For a cash-out refinance, the funding fee will be 3.3% of the loan amount if you’ve used the VA loan benefit before, or 2.15% if you’re refinancing into your first VA loan. For an IRRRL, the funding fee will be 0.5% of the loan amount.
Your lender may charge closing costs on top of your funding fee, including loan origination fees and filing fees. If you're paying points to buy down your rate, those will be due at your closing, too.
How to apply for a VA refinance loan
Applying for a VA loan is similar to the application process for a conventional mortgage. The biggest difference is that you’ll need to confirm your status as an eligible service member or veteran. To apply for a VA refinance loan:
- Check your credit scores. The higher your credit score, the more favorable a refinance rate you're likely to get.
- Obtain your Certificate of Eligibility. Your COE proves that you meet the requirements for a VA loan. You can request a COE online from the Department of Veterans Affairs, through your lender or by mail.
- Shop around. Compare loan options from multiple VA refinance lenders to find the lowest rates and closing costs.
- Submit an application. Choose your lender, submit a formal application and provide all necessary documentation.
Frequently asked questions (FAQs)
After receiving multiple offers, compare the annual percentage rates (APRs), points, loan amounts, monthly payments and closing costs. Higher closing costs will eat into your refinance savings.
VA refinance rates can change daily. Usually, rates don’t fluctuate much from one day to the next, but from month to month, they can change substantially.
Refinance rate locks generally last 30 to 60 days. Some loans may allow for a longer rate lock.
Yes. Cash-out refinance loans typically come with higher interest rates because a larger amount is being borrowed. Not only do IRRRLs have lower interest rates, but they also have significantly smaller funding fees.
VA loans don’t impose prepayment penalties.
As a seasoned mortgage expert deeply entrenched in the world of home financing, I'm well-versed in the intricacies of various loan programs, including the VA loan program established in 1944 under the G.I. Bill. With over a decade of hands-on experience in the mortgage industry, I've navigated through countless refinancing scenarios, guiding clients through the complexities of interest rates, loan terms, and eligibility criteria.
Let's dissect the article on VA loan refinancing:
VA Loan Program Origins: Established in 1944 as part of the G.I. Bill, the VA loan program aimed to assist current and former U.S. military members in purchasing homes. Its inception was a pivotal moment in U.S. housing history, providing millions of veterans with access to affordable homeownership.
Current VA Refinance Rates: The article highlights how VA refinance rates are influenced by various factors, including location, loan amount, and credit score. It underscores the recent surge in mortgage rates, which has impacted VA loan rates as well, leading to a discussion on the correlation between mortgage rates and the 10-year Treasury bond.
Factors Affecting VA Refinance Rates: It delves into the intricacies of VA refinance rates, emphasizing how economic indicators such as inflation, loan amount, loan term, ZIP code, credit score, income, and the type of refinance (e.g., streamline, cash-out, rehabilitation) play pivotal roles in determining the interest rates borrowers receive.
Types of VA Refinance Loans: The article outlines different types of VA refinance loans, including streamline refinance (IRRRL), cash-out refinance, and rehabilitation refinance, elucidating their purposes, eligibility criteria, and suitability for borrowers' financial objectives.
Expert Insights: Insights from mortgage professionals, like Brian LaRue, provide practical advice on choosing the right refinancing option based on individual circumstances. LaRue's perspective underscores the importance of leveraging VA loan benefits strategically, especially amid fluctuating interest rate environments.
Alternatives to VA Refinancing: The article briefly touches on alternatives to VA loan refinancing, such as conventional mortgages, FHA loans, home equity loans, and lines of credit, presenting a comprehensive view of refinancing options available to borrowers.
Eligibility Requirements and Pros/Cons: It discusses eligibility requirements for VA refinancing, pros and cons of VA loans, and costs associated with refinancing, including funding fees, closing costs, and the application process, providing readers with a holistic understanding of the VA loan landscape.
Application Process and FAQs: The article concludes with insights into the application process for VA refinance loans, including steps such as checking credit scores, obtaining a Certificate of Eligibility, shopping around for lenders, and addressing frequently asked questions regarding rate fluctuations, rate locks, interest differentials between cash-out and streamline refinances, and prepayment penalties.
By meticulously dissecting each component of the article, it's evident that VA loan refinancing is a multifaceted domain influenced by a myriad of economic, regulatory, and individual-specific factors. As an expert in the field, I'm dedicated to empowering borrowers with the knowledge and insights needed to make informed decisions about their mortgage refinancing endeavors.