VA Home Refinance

When I wrote about my VA home loan, I said: “I got my loan at 4%, and I don’t expect rates to be this low again in my lifetime, much less go under 3% to make it worth it.” I never claimed to be clairvoyant…

This is going to be part informative, part rant. What else is new?

Officially, this is called an Interest Rate Reduction Refinance Loan. IRRRL, for short, sometimes pronounced earl. Honestly, the steps, terms, and bureaucracy aren’t that different than an initial VA loan. The VA doesn’t require a costly appraisal - but the bank can require it. You still have the VA guarantee a good chunk of the loan, as well as being able to use them to help deal with lenders if you run into trouble - which you hopefully will not, but times are insane.

No rule says that if you refinance your VA loan that it has to be a VA refinance. In my case, the rate was significantly lower over a conventional loan, but there are catches. I would have had a lot more flexibility and options with a conventional mortgage.

The first, and most important catch, is that the result of a VA refinance must lower the monthly payment. The exceptions are if you are refinancing an ARM loan that is about to have a balloon payment or if you are adding energy-efficient upgrades to the loan.

Unfortunately, the only thing I need energy-related is central air conditioning, which my house sadly lacks. It can get 110 degrees here, so I suppose it would be nice. Since I am not upgrading, it doesn’t count as an energy-efficient upgrade. At least there are HELOCs (Home Equity Line of Credit) that I can set up and see if I can get it done. I have two portable AC units that do an okay job. It would be nice to get a central system installed. We’ll see.

You can’t take out cash from the loan, but somehow I did. For some reason, I got about $2200 back at the close, but I don’t understand why. They said something about discounts on all those awful fees, but why not just lower the loan amount? I could never get a proper answer. They seem to do things because that is how they are done. Yes, there are the same disgusting fees as when you first buy your home, even title insurance, which makes zero sense to me. I took out title insurance when I first bought this dump. What is the point? I couldn’t get a satisfactory answer about that either. They even had to re-register at the county office, even though I was the only name on the deed and that is still the same. So I had to pay for a copy/paste. So annoying.

At least the refinance fees can be rolled into the loan. I didn’t pay one penny out of pocket, but I could have. Maybe I should have.

Like any other VA loan, the fees are restricted and capped for VA refinance loans. Of course, the banks get around this by pushing disallowed fees into the “origination fee” which is capped at 1%.

The VA charges a funding fee to help pay for this awesome program, just like a normal VA loan. It ranges from 0.05% to 3.3% of the purchase price depending on if you are active duty, or reserves, or a vet, and whether it is your first home or not. Other criteria are: is it a manufactured home, and did you put money down? The fees are detailed here.

If you are receiving money for service-connected disabilities or receiving military retirement pay instead of VA disability payments, you are exempt from the funding fee. Surviving spouses of those that died during service or died due to their service-connected disability are also exempt.

Story and rant time to describe the process.

I used a different credit union than I used when I took out the original loan. I am pretty sure credit unions suck as bad as big banks based on my two interactions with them. I switched to another institution because the loan officer for my original loan mocked me during close, and they sold my loan to one of the worst banks in the country not named Bank of America or Wells Fargo.

It is also a bank that operates nowhere near here. They were constantly screwing up my escrow, both massively overcharging and undercharging at various times, and it was next to impossible to get a hold of them.

The forms to fill out and the information needed is identical to new loans, except they want information on the current mortgage, escrow, and homeowners insurance.

The new credit union is so far a little better, except that it took them over two months to get it done, and they were initially trying to push a far more costly conventional loan.

When my offer was accepted in 2018, it took 17 days to close.

On the plus side, I never had to see anyone in person or even talk on the phone to get the refinancing going. That was super nice. Well, I did have to go to the title company building to sign the final documents. At least no one from the bank was there. They claim they will not sell the loan, but initially said they would, but I am set up to make payments at the credit union. Another plus: I don’t have to make a mortgage payment in September or October, which is super nice.

Especially since I might need to get a new car soon, assuming any are available. I have had my car since 2005, so I guess it is time for a new one since it is acting up. I am looking at a hybrid SUV. My old car got close to 40 MPG, and I want a bigger car that is not worse for gas mileage. Okay, that is way off-topic, but another stress.

So why did I refinance? It doesn’t always make sense to do it.

Things are going bad, and due to many selfish people, things are not getting better. They are worse than ever. A consequence of that is interest rates are artificially low. It seems that low interest rates are a good thing, but inflation is creeping up in part because of the interest rates. It also makes it harder to respond to any other financial macroeconomic disasters that might happen, but that is getting too far into the weeds.

I have worked hard to flatten my expenses, and this was an excellent chance to compress it and then keep it flat - minus a new car *sigh*. This is a chance to shrink my finances. Lowering my biggest expense + a huge increase in my VA disability payment due to inflation will more than cover a new car + insurance. Even with a new car, I will be ahead next year, all because things are going bonkers. That is surreal, huh?

I saw that interest rates had fallen a bit under 3%, which was a signal to investigate. I put some figures through my calculator and saw that it would be to my advantage to do this.

I filled out the initial application and was quoted 3.0% for a conventional loan and 2.5% for VA refinance. I was tempted to get that conventional loan. That way, I could take out extra to pay for AC and finish my basement and even get a few things done outside, and that wouldn’t change my payment much. Of course, that depends on the appraised value, but the bank thought it would come in around $350,000. That is just nuts. I paid $240,000 in 2018, and the market was nuts then. It is insane today.

I knew I might need a car, and shrinking my payment just felt better. I know making financial decisions based on feelings is epic stupidity. I crunched the numbers and accounted for building materials being hard to come by these days and thus, expensive. I opted to wait to finish the basement.

A week later, I had decided on a VA refinance, and the new quoted rate was 2.625%. So, I pushed hard to get it done fast, lest rates go higher before the rate locks. Well, the credit union was slow. When they sent a form or asked for information, I returned it the same day, but they still drug their feet. Every week I would ask how it’s progressing and rarely got an answer. They insisted on an appraisal, so that took two weeks. It came in at $405,000!!!

Words can not express how insanely stupid that is. I would hate to meet the person willing to spend that much. To be perfectly honest, I couldn’t sell it for that much and not feel massive guilt. I could sell my house for $100,000 lower than “market value” and live very comfortably for the rest of my life in Southeast Asia on the profit.

I am so tempted.

The way the housing market works is insanely broken and needs a completely new system. Honestly, I thought $240,000 was about $100,000 too much given the size and build quality, but it did originally sell for $160,000 when it was built in 2009, so I am not far off on my estimation. This is not a $405k house. 20 years ago, just outside Seattle, my sister bought a mini-mansion for not much more than $405k and is huge and well-built and that area has always been expensive compared to here.

I think a crash is coming to my area and I cannot wait. I do not live in a wealthy area and people are about to get taxed out of their homes. Bad things are coming to good, hard-working people, and it sucks.

Anyway, two weeks after I finally got the appraisal, I get sick of waiting and write an email asking for the status. I am kind of stuck at this point because I am on the hook for the $800 appraisal fee and a few other fees. If I pulled out now, I am out a good chunk of money. I was really worried that interest rates would increase to the point where it would not be worth it. A week after sending the email, I finally get notified it is going to underwriting and that they locked my rate at 2.25%!

The next day the final approval was complete. For some reason, it still took two more weeks to sign everything and get the funds dispersed. All I am waiting for now is to get the overpayment and escrow funds from the old loan holder. For some reason, the new bank added some money into the loan to seed to the escrow account instead of just transferring funds from the old escrow account.

Why? Who freaking knows!

I am thinking about closing my escrow and just putting money in a high-yield savings account and just pay the home insurance and property taxes myself.

So, my old loan had principle and interest at around $1170 a month. The new loan is $895 a month. If my awesome math skills are correct, that is a savings of $275 a month. Not too shabby. Of course, insurance and taxes remain the same. About $650 a year for insurance and $798 for property taxes due to my disabled vet exemptions. Without the exemptions, the property tax would be almost $3500 when it was $2900 in 2018. Yikes! If I did the math correctly, the new loan will pay for itself in 14 months - ie cover all the new fees and will save tens of thousands of dollars over the life of the loan, which will likely outlive me.

Like VA loans, VA IRRRL loans are assumable. That means that someone who otherwise qualifies for a VA loan can take over the loan. Same terms and same payment. My son-in-law is a vet also. They could take over the house in the event of my very timely demise.

All things considered, it was a good move on my part. Because of inflation, my VA disability is likely to increase by over $200 a month next year. Despite inflation rates, my life is so boring and predictable that inflation barely touches me. I guess that is good. I hate that a new car would eat more of it, but I always have money left over each month and could pay down the car somewhat fast. It is not like I need to save more money than I already have. I think right now I have $8000 or so available in cash. Outside of the down payment for the car, the car won’t touch it. As much as I complained recently about the downsides of having an income that doesn’t depend on if I stay busy or watch TV all day, there are great benefits as well. It is almost like I have $1 million in a low-performing index fund paying out 4.4% or so. Except, of course, I can’t touch the “principle,” but who would do such a thing?

I have been researching good sites like this one and while buying a brand new car is not Moustachian, I tend to keep my cars for 15+ years, and this would be about the same as replacing an $8k-$10k car every 5-6 years.

I am sticking to solid brands. Although, my last car was a crappy Hyundai Elantra, bought in September 2005 for $13,300. Outside of tires and oil changes, this car has needed a new battery, 2 headlights, and a coolant hose. That is pretty dependable. The way the car is acting, that dependability might end in a year or two. There is a very good chance that this is the last car I will have, so why not have a comfortable car that has room for my fishing gear, inflatable pontoon, and grandkids all at once?

Assuming I can even find a car on a lot, it may take a few months. I have an appointment on Thursday to talk to a dealership. It looks like I would need to lease it and then outright buy it to afford a RAV4 XLE Premium comfortably.

The low-end LE model would still be in lease territory and not nearly as nice for the money. I still need hard numbers to figure it out completely.

I could do a few odd jobs over the lease period and have 10-12k saved up as a down on the loan, for the payoff after the lease expires. Leaving about $10k left to finance, which I could pay off pretty quickly. Depending on what interest rates do, it would perhaps be cheaper overall and would pay it off much faster than the eight or nine-year loan that it would take if I did conventional finance, and that would suck because the interest would add up super fast.

I could qualify at the credit union at 2.1%. A three-year lease + 2-3 years to pay it off would likely cost less overall, even comparing a 5-6 year loan which would be steep monthly payments.

I am not keen on the idea of leasing, but I am less excited to roll the dice with a used car. I always have bad luck with used cars.

Of course, that depends on what interest rates look like in three years, and I wouldn’t even try to guess.

At any rate, it will take weeks to get one because of supply issues and the pandemic. Most of the problems and deaths this year were mostly avoidable. grrr

I am still stressed after the refinance, and is difficult to focus on car buying. The old loan holder, BB&T owes me about $1900, and I don’t trust them to quickly refund it.

As much as the new credit union annoyed me, they have things to like. A 5% interest savings account for the first $500 and then the standard crap rate for balances above that. Unless you put a lot of money in it, that is far better than what the high yield savings accounts offer right now, which is 0.50% or so. A year ago, it was 2-2.5%. Setting up new accounts is super easy, no need to go to the bank for anything. That makes my avoidant personality happy.

If you are considering a home refinance, consider moving on it pretty quickly. Because of inflation, interest rates are likely to rise to help tamp it down. The pandemic made many things wonky, so the normal course of increasing interest rates might not be enough. In a year or two, I would expect mortgage rates to be closer to 5%, which is where it was heading in 2019. I am really super bad at guessing the future of such things, but I suspect that once production and supply chain issues start resolving, interest rates might rise to control inflation.

Cheap money is a good thing to help get things back to normal after bad economic events, but low interest rates won’t last forever and are damaging things at a macroeconomic level.