My wife and I bought a home less than a year ago. We love the house, our neighborhood, and the general area where we live. Little did we know that less than a year later, we would refinance our home. But that’s OK. Since we relocated to a new area and were living in a short term rental, we only had a limited time in which to house hunt, negotiate with the seller, lock in the interest rate on our loan, and complete the sale.
Completing the loan process for us was a little more complicated than normal for two reasons – the first is that we were using a VA Loan, which adds a layer of paperwork for the buyer (certificate of eligibility, VA appraisal, proof of service, etc.). The second reason is that I am self-employed, and buying a home with self-employment income can be a little tricky. We had to provide copies of our previous tax returns, plus an income statement certified by our accountant (note that we had moved to a new area, and we were buying a home in April – not the best time to find a new accountant for non-tax return related items!).
Deciding When to Pull the Trigger on the Refi
When my wife and I bought our home last April, we were happy with the interest rate we locked in (4.75% APR). At the time, interest rates were hovering at close to record lows. Since then, however, we have watched the interest rates continue to drop. Rates didn’t drop steadily, but they hovered right around, or below the interest rate we locked in when we bought our home.
Finally, we locked in a new interest rate at the end of December of last year. By that time, we were able to lock in a loan at 4.0% APR* – with negative points, meaning we had some cash coming our way to help offset the majority of the closing costs. At the end of the day, we were able to refinance our home to save almost $100 per month, and the refinance will pay for itself in roughly one year. At that point, it didn’t make sense not to refinance our mortgage.
We could have actually gotten a lower interest rate, but we would have had to pay three or four points on our loan, which would have cost several thousand dollars up front. Though it would have saved more money over the life of the loan if amortized completely, I didn’t feel it was worth paying the few extra grand up front – it would have taken several years to pay off the cost of the points, and then we would only be saving an extra $20 or so per month in payments. Our plan is to continue making our old payments (or higher), so we will be chipping away at the principle more quickly anyway. Since we will be prepaying our mortgage, it didn’t seem to make as much sense to buy as many points for the lower interest rate, as it would be years before it balanced out (at least, if the Excel spreadsheet I created to compare the interest rates had the correct calculations!).
* Though we completed our mortgage refinance this past week, we actually locked in our interest rate almost two months ago. The kicker is that mortgage rates have dropped even lower than when we locked in our current interest rate. No complaints on my end though – we are still saving almost $100 per month, and we will save tens of thousands of dollars over the course of the loan. (waiting for your target refinance rate can be a guessing game anyway, so in my opinion, it’s best to just pull the trigger when you are happy with the current rates).
If You Have a VA Loan, use a Streamline Refinance
As I mentioned earlier, buying our home was a little bit of a hassle, since I am self-employed, and we had to jump through hoops to verify our income, meet the VA loan qualifications, etc. I was afraid the refinance process would be similar, however, I was very pleasantly surprised with how smoothly it went. The VA Loan has a process called an Interest Rate Reduction Refinancing Loan (IRRRL), or Streamline Refinance, which makes it incredibly easy to refinance a VA loan. Since the VA Loan qualifications have already been met, the house has been appraised for VA purposes, income has been verified, etc., you aren’t required to do all the leg work again.
So basically, all we needed to do to refinance our home was fill out the refinance application, and meet with the title insurance company to sign the documents. What turned out to be a 20 hour process on the purchase side of the loan, turned into a 2 or 3 hour process for the refi. (times are guesstimated; basically all I had to do for the refi was make a few phone calls, then set up the appointment to sign the documents, which took 45 minutes).
I couldn’t be happier with how easy it was to complete the process, and our lender, USAA, was a pleasure to work with, as always. (Seriously, I can’t say enough how much I love banking with USAA). But I also recommend shopping around. There are many great places to get a mortgage, and you may be able to save a lot of money by shopping around.
If you have a VA Loan, now is a great time to consider refinancing at a lower interest rate. And the Streamline Refinance process makes it incredibly easy to do. You can find more information on VA Loans at our sister site, The Military Wallet, or you can get a quote directly from Veterans United Home Loans, a leading VA Loan provider.
Photo credit: nikcname