If you are like most homeowners, you want to own your home as fast as possible. No one likes having a mortgage hanging over their head, but with hundreds of thousands of dollars to pay off, how do you make it happen fast?
While you can make extra payments toward your loan’s principal each month to pay your loan off faster, there is one trick many people don’t know about yet. If you have a VA loan, you can use the VA streamline refinance to help you get ahead on your loan faster.
Keep reading to see how it’s done.
Refinance at the Right Time
The first secret is to make sure that you refinance at just the right time. This involves watching interest rates carefully. The higher your interest rate, the higher your mortgage payment becomes. This leaves you with less of a chance of paying more money toward your loan’s balance. If you can lock in a low interest rate, though, you limit the amount of interest you pay, giving you a better chance at having extra money to throw towards your loan.
Choose the Right Term
The best way to get your loan paid down faster is to lower your loan’s term. If you have a 30-year term, you may knock a few years off the term, but is that enough? What if you could knock off 15 years off your term? If you qualify for a 15-year loan, it’s possible!
Before you take the 15-year term, though, make sure that you can afford the payment beyond a reasonable doubt. Because you will pay the loan off in half of the time, you need to make sure that you can afford the higher principal payment.
Qualify for the Streamline Refinance
Finally, you have to qualify for the streamline refinance. Luckily, qualifying for this loan is much easier than a fully underwritten loan. As the name ‘streamline refinance’ suggests, you don’t have a lot to verify in order to get this loan. Typically, you must:
- Prove that you have a current VA loan
- Prove that you made your last 12 months of VA loan payments on time
- Prove that you benefit from the refinance (shorter term, lower payment, etc.)
This is all that the VA requires. Now because lenders do the underwriting, you may come across a lender or two that will require a few more qualifications. In general, though, lenders don’t have to pull your credit, verify your home’s value, or even verify your income. Lenders are able to use the qualifications used for your original VA loan assuming that you made your last 12 VA loan payments on time.
What’s the RightTerm
It’s important to understand that you won’t automatically pay your loan off faster if you refinance. In some cases, for example, you may extend your loan term without even realizing it. Here’s how that happens.
Let’s say that you have a 30-year term now and you’ve made payments on the loan for five years. You decide you want to refinance because you know that you can get a lower interest rate. You refinance, but you take another 30-year term. You just added five years onto the time that it will take for you to become free and clear of your mortgage.
If on, the other hand, you refinanced into a 25-year term, you would still pay the loan off at the same time. Hopefully, with the lower interest rate, you’d pay less interest over the life of the loan. You still wouldn’t pay the loan off any sooner, though. The only way you’ll own the home faster is if you refinance into a term that is shorter than what you have left on your current term.
What’s Your Break-Even Point?
The other thing you must consider is the break-even point. No refinance comes free of cost, unless you opt for the lender-paid closing cost loan. If you do, though, it usually comes with a higher interest rate, so it doesn’t work in your favor.
Your break-even point is the point when you pay off your closing costs and realize the savings of the new loan. Since closing costs can be as high as 5% of your loan amount, it’s important to understand when you would pay them off. If it will take you too long to pay the closing costs off, it won’t benefit you to refinance just to pay the loan off sooner because it will cost you so much in closing costs.
You can figure out your break-even point by doing the following:
Total closing costs/Monthly savings on the new loan = Months to break-even
If you can break even in less than 36 months, then the refinance might make sense, especially if it will help you own your home faster.
The VA streamline refinance doesn’tautomaticallyhelp you own your home faster. You have to choose the loan that has the terms that will make it possible to own the home faster. With the right combination of factors, though, you can own your home in less time.