Back in May, Congress passed and the president signed into law a new bill known as the Economic Growth, Regulatory Relief, and Consumer Protection Act.
Like many acts passed into law, this bill applies to numerous sections of the legal code, and it would probably help to have a couple of days and access to a dictionary to get through it all. For now, the thing that’s important to note is that it could have a major effect if you’re looking to refinance your VA loan.
We’ll cut through the jargon to go over what this means for eligible active-duty service members, veterans and surviving spouses.
Extended Timeline Between New Loans
The first big change involves the timeline to get a new VA loan if you have a current mortgage loan. You sometimes hear this referred to by lenders as seasoning. It really just refers to how old your current loan is.
Under the new law, if you’re looking to refinance into a VA loan or go from one VA loan to another, there’s now a minimum waiting period of 210 days measured from the day you make your first payment on your existing loan to the closing date of your new one.
Tangible Benefits for Veterans
One of the big requirements of the new legislation is intended to protect VA clients from getting into mortgage loans that don’t necessarily benefit them financially.
In order to meet this goal, the bill puts a couple of new requirements in place for VA Streamlines. Depending on where you look, you may also see these referred to as an Earl or IRRRL (which stands for Interest Rate Reduction Refinance Loan). These VA Streamline requirements apply when a veteran or eligible non-veteran is refinancing a previously existing VA loan into a new one.
In order to give VA clients tangible benefits with their new loans, the VA requires a minimum interest rate reduction for Streamlines:
- If you’re going from a fixed-rate loan into another fixed rate loan, your interest rate must drop by at least 0.5%.
- If you’re going from a fixed-rate loan to an ARM, the rate must fall by at least 2%.
While the test on its face is simple, there are additional stipulations if you buy down your interest rate with mortgage discount points to make your loan work.
Mortgage Points and Appraisal Requirements
Mortgage discount points represent one way to lower your interest rate by prepaying a certain amount of interest upfront at closing.
Briefly, the basic formula works like this: one point is equal to 1% of the loan amount. You can buy points in increments as small as 0.125%.
Let’s say paying for one point upfront on a $200,000 loan saves you $50 per month on your payment. You break even and start making money on the deal after 40 months. ($2,000/$50).
This will give you more info on points, but how does this apply to your VA Streamline?
If you’re buying mortgage discount points to meet the rate test, buying one point or less allows you to refinance up to the full value of your home, even if you don’t have equity.
If you do buy more than one point, you have to have at least 10% equity in your home in order to qualify for the new VA loan.
In addition to the financial considerations of this, be aware that there’s the possibility that your refinance could take just a little bit longer in some cases because your equity amount has to be verified by appraisal. You build equity based on making your payment every month, but the equity you have can also fluctuate with your home value.
If home values are rising, you may have more equity than you think. If they’re going down, not so much. The appraisal helps verify your home value and equity amount.