VA loan vs. Conventional loan
As interest rates have fallen over the past few years, VA borrowers took advantage of lower interest rates as they fell with a VA streamline refinance, reducing the amount of interest paid to their VA lender. VA loans allow the new refinanced loan to be 100% of the value of the property, given lender’s VA loan limits. Lenders typically limit a VA home loan to $417,000 in most areas and $625,500 in specific “high cost” areas.
However, for those with a conventional mortgage, refinancing guidelines can limit a refinance only up to 90 percent of the value of the home. And to add to that apparent problem, home values have indeed fallen during that same period leaving many conventional borrowers out in the cold, unable to refinance into a new conventional mortgage with a lower rate.
But what many may not know is that a conventional loan can be refinanced into a VA loan as long as the loan does not exceed the 100 percent VA limit. For those with VA home loan eligibility, this provides an opportunity for borrowers with a conventional loan to refinance out of their higher rate into a lower one.
For example, if a borrower has a conventional loan amount of $200,000, the value of the home needs to be at least $223,000 in order to be eligible for a conventional loan. And this doesn’t include closing costs. If the borrower rolled closing costs of $4,000 into the new, refinanced loan, the property would need to be appraised at $227,000. If the actual appraised value came in at $210,000, the loan could not be refinanced into a standard conventional mortgage.
However, under that very same scenario, the loan qualifies to be refinanced into a VA fixed rate loan as long as the borrower is eligible for a VA home loan. If you or someone you know has equity problems with their property and are VA-qualified, consider switching from a conventional loan to a VA.