You have a VA loan and know that you can refinance easily with the VA streamline refinance. Should you do it just because you have the right to do so?
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It’s probably not the best idea. You should refinance only if it makes sense. So how do you know if it actually makes sense to do so? It comes down to the monthly savings and the overall cost of the loan.
In the mortgage industry, they call it the break-even point. This is the point that you pay the closing costs off and start realizing the monthly savings. For example, if between the loan costs and the savings you reap it takes you 10 years to hit your break-even point, it probably doesn’t make sense. If, however, you are able to break-even after just a couple of years, it may work in your favor.
Keep reading to learn how to calculate your break-even point.
Determining the Break-Even Point
In order to determine your break-even point, you must determine how much money you’ll save each month. Let’s say the new, lower interest rate could save you $100 per month. That sounds like a great deal, but don’t jump on it just yet. Instead, you need to compare it to the closing costs or the amount it costs you to take out the loan.
The VA streamline refinance has similar closing costs to any other loan. Let’s assume in this case that the closing costs will be $5,000. You would then determine your break-even point as follows:
$5,000/$100 = 50 months
In other words, it would take you 50 months of making the lower mortgage payments before you would realize the savings. Yes, you would pay $100 less per month, but it would cost you that extra $5,000 up front to get that lower payment.
Does Your Break Even Point Make Sense?
The next thing you have to think about is if the break-even point even makes sense. In our above example, you would need to be in the home for 50 months just to break even. Now, what if you move away after 60 months? You only realized savings for 10 months. Was it really worth paying that $5,000 upfront?
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This part of the decision is a personal decision. You have to figure out what seems right for you. If you know that you’ll stay in the home for the long-term, it could absolutely make sense. If, however, you know that you will move relatively soon, it may not be in your best interest to pay those closing costs. You would probably pay less in extra interest by keeping the higher interest rate and not refinancing.
Refinancing Into a Lower Term With the VA Streamline Loan
The VA streamline loan does offer the ability to refinance into a shorter term. In this case, you cannot use the break-even point. You would instead, have to first determine if you can afford the higher payment. Let’s say you refinance from a 30-year loan to a 15-year loan. You just cut the term in half, which means you have half of the time to pay it off.
Where you save when lowering the term is in the interest. In this case, you’d have to figure out the total interest you’d pay over the life of the loan. You can tell the total interest on your current loan by looking at your amortization table in your loan closing documents. When you secure the quote for the shorter term with the VA streamline refinance, ask about the total cost of interest. You can then compare the difference to see if it’s worth it.
If you don’t save money on the VA streamline refinance either monthly or in interest over the life of the loan, it might not make sense. Make sure to take the time to determine your break-even period to see if it’s something that makes sense for you. If the break-even point is too long or just doesn’t seem feasible, you may be better off leaving your loan as is. Remember, you can always make extra payments on your current VA loan to get the principal paid down faster which sometimes is the better option than refinancing.
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