VA LOAN CAPTAIN BLOG & Learning Center

A 35 Year Loan?

By: Grant Moon 11/14/14 11:39 am

Mortgage rates for VA loans have been acting strangely over the past several weeks. They’re going down. Not by a whole lot but falling nonetheless. After bouncing around the 4.25% mark for quite some time now they dipped below the 4.00% floor for about three weeks and it appears 4.00% is where rates may hover for the next few weeks. That might cause a few of those procrastinators out there who might think it’s time to refinance their VA mortgage. If a current rate is say 4.50% then it may not make sense to refinance into a 4.00% note. It might, but speak with a VA loan officer to make sure.

However, if a 30 year VA rate is around 5.00% or above, it’s likely the loan is about five years old. For much of 2009, the average 30 year VA rate floated between 5.00 and 5.50%. If rates are now 4.00% and a borrower has a 5.00% rate, that might be an attractive option. But there’s more to it than just the interest rate. You have to consider how long you’ve been paying on your current mortgage.

Let’s look at a $200,000 mortgage funded five years ago, a 30 year note at 5.00%. The principal and interest payment is $1,073. Today, the principal balance on that loan is about $183,000, or $17,000 lower. That’s the amount of principal paid during the course of 60 months yet you also paid just over $49,500 in interest. If you refinanced $183,000 with another 30 year note this time at 4.00%, the monthly payment falls to $873, for a monthly savings of $200. That’s a no-brainer, right? Maybe.

If you refinance from one 30 year loan into another, you’ve lost five years of interest and in effect you got a 35 year loan because you extended your note another 30 years. Not to mention the $49,500 in interest you paid. Yes, there are closing costs involved as well as a funding fee but for comparative purposes the result is essentially the same.

To avoid losing those five years, consider refinancing into a 25 year VA loan. The payment rises to $965 but you’re still saving $108 per month. Refinancing and lower rates go together. But so too does the term of the loan.

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