Conventional to VA Refinance: Does It Make Sense?
Refinancing a mortgage loan makes sense for a couple of primary reasons. The first is to lower the existing mortgage rate to save money on interest paid to the lender. The second is to change the type or term of the loan, say from an adjustable rate mortgage to a fixed rate or to change the term of the loan. Shortening the term of an existing mortgage increases the monthly payment but decreases the overall interest paid. The opposite applies when refinancing from a short term loan to a longer term—there is more interest paid to the lender but the monthly payment goes down.
And there’s another reason to consider refinancing. Refinancing a conventional mortgage into a VA loan. Does that even make sense? Yes. Not often, but it can.
It can make sense to refinance a conventional loan when there is very little or no equity in the property. To refinance an existing conventional loan into another, the new refinance guideline requires there be at least 10 percent equity in the property. In fact, any non-VA loan may take advantage of a VA refinance.
The VA refinance program doesn’t require any equity. That means if a borrower has a non-VA loan and the amount owed is $100,000 and the value is $100,000, a VA refinance could work whereas a conventional loan could not. This example isn’t using the Interest Rate Reduction Refinance Loan, referred to as the VA streamline, but a standard VA refinance.
This type of a refinance isn’t very common but in the right circumstance, it can be a game-changer. If you have this type of situation and your current loan can’t be refinanced using any other program, use your VA eligibility and get out from under that higher rate.