When a VA Refinance Makes Sense

Choosing to refinance a home may not feel as emotional as buying one, but it’s still a big financial decision. When refinancing a VA loan, it’s more about if refinancing puts you in a stronger financial position.

For many Veterans, a VA refinance can lower monthly payments, bring long-term stability or unlock home equity. For others, the timing or costs may not make sense. Knowing when a VA loan refinance is the right move can help you avoid extra expenses and get the most from your hard-earned benefits.

Here are a few scenarios when refinancing with a VA loan makes sense.

1. Your New Interest Rate is Low Enough

One of the most common reasons to refinance is to secure a lower interest rate. When VA loan rates fall below your current interest rate, refinancing could lower your monthly payment and reduce the total interest you’ll pay over the life of the loan.

The VA’s main refinance option is the Interest Rate Reduction Refinance Loan (IRRRL), also called the VA Streamline. The program is only for Veterans with an existing VA loan and comes with rules about how much lower the new rate must be.

Lenders often talk about rate changes in basis points, where one basis point equals 0.01%. For example, a drop from 3.5% to 3.0% is a 50-basis-point reduction.

Here’s how the IRRRL requirements work:

• Fixed-rate VA loan → Fixed-rate VA loan: New rate must be at least 50 basis points (0.50%) lower.
• Fixed-rate VA loan → Adjustable-rate VA loan: New rate must be at least 200 basis points (2.00%) lower.
• Adjustable-rate VA loan → Fixed-rate VA loan: No rate reduction required.

For example, if your current fixed VA loan has a rate of 3.5%, your new fixed rate must be 3.0% or lower to meet the 50-basis-point rule.

The VA’s other refinance option, a VA Cash-Out refinance, is not subject to rate reduction requirements.

2. You Meet VA Refinance Seasoning

Before you can refinance with a VA loan, you’ll need to meet both of the VA’s seasoning requirements:

• At least six consecutive monthly payments on your current mortgage
• At least 210 days after your first mortgage payment

If you’re not eligible yet, this waiting period can still work in your favor. Use the time to:

• Watch interest rates so you’re ready to act when savings opportunities appear
• Build your credit and pay down debt to qualify for better terms
• Talk with a VA lender about your goals and timeline so you can move quickly once you’re eligible

Keep in mind that lenders may add their own seasoning requirements to the VA’s rules, so check ahead of time.

3. You’re Shortening Your Loan Term

Refinancing doesn’t always lead to immediate savings. In fact, moving from a 30-year term to a 20- or 15-year term usually increases your monthly principal and interest payments.

But the trade-off is powerful: Refinancing to a shorter term can save you thousands in interest over the life of the loan. The key is making sure the higher payment fits comfortably in your budget.

See how much you can save in interest with our VA refinance calculator.

If a refinance isn’t the best choice right now, another option is to make extra payments directly toward your principal. Even small additional payments each month or year can help you pay off your loan faster without changing your loan term.

4. You Currently Have an Adjustable-Rate

Adjustable-rate mortgages (ARMs) aren’t inherently bad or problematic, but they’re definitely not for everyone. One of the challenges with ARMs is uncertainty. Once the introductory period ends, your interest rate and monthly payment can rise.

Refinancing from a VA ARM to a fixed-rate mortgage can provide predictable payments for the life of your loan. For example, if your ARM starts at 3% but is scheduled to adjust to 5% next year, refinancing into a fixed-rate VA loan now could protect you from that increase and give you steady payments for the rest of your loan.

While your monthly costs may increase initially, many Veterans find the peace of mind worth the trade-off. Plus, VA homeowners have access to some stellar fixed interest rates, especially in the current rate environment.

5. Your Savings Outweigh the Cost

Like most home refinances, VA refinances typically come with closing costs. In fact, the VA requires that a refinance provide a “net tangible benefit,” meaning it must put you in a better financial position.

A big part of this evaluation is how long you plan to stay in the home.

It’s important to compare the total costs of refinancing to how much money it’ll save you each month. Here’s a simple process to weigh the numbers:

• Calculate your refinance cost
• Estimate your monthly savings
• Divide cost by savings to find your breakeven point

For example, say a refinance with a VA loan costs you $3,600 and reduces your monthly payment by $100. When you divide the cost by the savings, you get the number of months it takes to recoup the refinance expense. For this example, the Veteran recoups the cost in 36 months (3,600/100) or 3 years.

If you expect to move out before the time calculated, refinancing may not be the best option.

The VA also requires recoupment within 36 months for IRRRLs, but lenders won’t count expenses like escrows for property taxes or homeowners insurance when calculating recoupment. There’s also less emphasis on recoupment for most VA Cash-Out loans.

Every homeowner’s situation is different, but if you’re likely to move before you recoup the costs of a refinance, you might take a step back to consider whether it’s a good investment. Homeowners should also understand that refinancing may result in higher finance charges over the life of the loan.