Your goal when you decide to refinance your VA loan is to get a lower rate and of course, you want to get it as low as possible. The good news is that there are ways to maximize how low your rate is compared to others, as not everyone gets the same rate. You may have to do some preparation work in order to ensure that your rate is low as is can go, though. The goal behind the VA Streamline Loan is to give you more disposable income on a monthly basis, so the process is not hard to go through, but you have to commit yourself to the process for the greatest outcome.
Make your Credit Score as High as Possible
You have direct control over your credit score, believe it or not. The higher your score, the better your interest rate will be on any loan, including the VA Streamline Loan. While the VA technically does not care about your credit score, you will be hard-pressed to find a lender that does not look at the score to determine whether or not you are a good risk. That being said, you should take the time to make sure you are making all of your payments on time. This means no late payments; in fact, the VA only allows a maximum of one late payment in the last 12 months in order for you to qualify, so you have to follow this rule and with on-time payments, your credit score will begin to increase. In addition, however, you should keep a close eye on how much outstanding credit you have compared to the credit you are given. If your utilization rate (your outstanding credit divided by your available credit) is too high, say over 30 percent, your credit score will decrease. In the months leading up to your desire to refinance, you should try to pay off as much of your outstanding credit as possible.
Lower your Debt Ratio
Technically, the VA Streamline Loan does not require lenders to re-evaluate your income or your debt ratio, but most lenders will, if for no other reason than to determine your interest rate. Generally, the higher the debt ratio, the higher the interest rate because you are considered a higher risk when you have more outstanding debts. Just as decreasing the amount of your outstanding debt can help your credit score; it will also directly help your interest rate. Typically, if your debt ratio is higher than 35 percent, the lender will consider you risky and increase your interest rate accordingly. If the interest rate increases too much, your debt ratio could get to the point that it does not do you any good to refinance as one of the requirements of the VA Streamline program is that you have to be saving money every month compared to your previous mortgage payment.
Take a Shorter Loan Term
The loan term also determines the riskiness of your loan. If you have the choice between a 30-year term and a 15-year term, you will get the lower interest rate on the 15-year term because that is half of the length of time the bank’s money needs to be outstanding. Of course, taking on a 15-year loan means your payment will be higher because you pay off the principal faster, so you will need to determine if you can afford the 15-year payments. If those payments are too high, consider a 20-year term, which is a happy medium between the 15 and 30-year term and can help you avoid adding years to your loan that you already took off by making payments on your original loan.
Banks look at the risk level of your loan in order to determine your interest rate. Typically, no two loans have the same rate because it is highly dependent on what you bring to the table, so to speak. If you are risky because you have a 30-year term, high debt ratio, and low credit score, you are going to have a much higher rate than someone with a 15-year term, average debt ratio, and good credit score. Taking the time during the months leading up to your VA Streamline Loan refinance to make sure everything is in order will yield you the best results.