Should I refinance my home?

25 Replies

Hey guys, thanks in advance for the help! 

I am a little confused as to when/if I should refinance my home. I purchased it via a VA Loan back in Oct '17 for $210k with a mortgage of around $1515 a month and a 3.75% interest rate. My friend (also military) has told me that I can refinance and lower my payment and I should at least wait to hit the year mark. Is this true? Should I use the VA IRRL or should I refinance with a regular bank?

Any information/experience you can offer me would be appreciated, I am trying to lower my monthly payment so that I can save up, move out of this home, rent it and purchase a multi-family home to house hack. 

Thanks again!!

Will it rent for a bare minimum $2000/month. If not then it is not a candidate as a rental property investment. Probably need even higher rent to see cash flow.

Originally posted by @Thomas S. :

Will it rent for a bare minimum $2000/month. If not then it is not a candidate as a rental property investment. Probably need even higher rent to see cash flow.

 Is this using the 2% rule? Unfortunately, I didn't learn about that until after I purchased my home...It would rent for around 1700-1800

@John Jimenez you can always ask for the rates and see if it makes sense. There are calculators out there to help do that.

There's no point in second-guessing your purchase -- it is now a learning experience! If you're thinking of turning it into a rental, first see what the market rent would be (do research on your own and talk with some property managers). Even if it doesn't break even, it may be cheaper to rent it than to sell it.

@John Jimenez and more toward your broader plan, it can work. But while you're saving up, consider a mini house hack and get a roommate!

@John Jimenez at 3.75% you'll have a hard time saving money unless youre putting a significant down payment against the loan. As a rental, it looks like a negative cash flow property. Your best bet, as I see it, would be to live there and purchase another property as a rental, or sell and move into something more suited for a rental/house hack.
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@John Jimenez , it really depends on what your goals are and what your plans for the property are. Since you used a VA loan I am going to assume that you do not have any equity in the property. A VA IRRL may lower your rate a wee bit but 3.75% is already pretty good, I doubt that the fees associated with the refi would justify it. If you could refi with a regular bank it certainly wouldn't hurt to free up your VA benefit, but again I doubt there is enough equity in the home to do that. It does not sound like a good candidate for a rental, so I would start thinking about your exit strategy...unless this is your home home perhaps.

Originally posted by @Edward B. :

@John Jimenez, it really depends on what your goals are and what your plans for the property are. Since you used a VA loan I am going to assume that you do not have any equity in the property. A VA IRRL may lower your rate a wee bit but 3.75% is already pretty good, I doubt that the fees associated with the refi would justify it. If you could refi with a regular bank it certainly wouldn't hurt to free up your VA benefit, but again I doubt there is enough equity in the home to do that. It does not sound like a good candidate for a rental, so I would start thinking about your exit strategy...unless this is your home home perhaps.

 Thanks for the input! I guess I will just look around for rates just in case it doesn't lower it enough to make sense (not sure what that number will be). I guess my only real option since this isn't a good rental candidate is to live here for a while and buy a new place to rent out... dang

@John Jimenez or you could refinance into a conventional loan. Then use the VA to go buy another property to house hack using the VA. I wouldn’t worry about the interest rate too much as long as your cash flowing even a little bit. You want to use that VA to your benefit. Wish I had it

Good luck

Originally posted by @Remone Randolph :

John Jimenez or you could refinance into a conventional loan. Then use the VA to go buy another property to house hack using the VA. I wouldn't worry about the interest rate too much as long as your cash flowing even a little bit. You want to use that VA to your benefit. Wish I had it

Good luck

 Hm, my only question would be, since this home isn't a great rental what else would I do...I don't think I would get my money back in this house at the time I was desperate for a home and overpaid haha...............................................................lessons learned.

@John Jimenez well if you can rent it and make enough to pay the mortgage and then some then I would refi and take money out if possible. Then go find a duplex/triplex/four plex and get in it with no money down VA to house hack boom! You may have to wait 6 months to refi but that’s three months away no biggie just save some money, talk to lenders and get ready for the next property

How many rooms does it have ? Are you willing to rent per room or do airbnb ? Whats your market like, do renters want your type of home? Are you willing to take section 8 if you can cash flow? There are lots to consider, can you force equity with minor cosmetic upgrades to sell at break even or profit? Remember your VA loan goes up to $450k i think so you still have $240K of it you can leverage to purchase a duplex etc.

Hey John. You may already know this, but it bears mentioning...if you refi with a conventional loan, i believe that'd require 20% down. If you don't have 20%, you'd pay  private mortgage insurance.  Either way, it may not result in an overall vast improvement to your cash flow or savings. 

I'm not sure of the various features of VA loans, but based on the post I'm guessing your limited on how much VA loans you can use. If thats true, it might be worth looking into getting a roommate (s) to subsidize your current mortgage and allow you to save more money quicker provided your living situation would allow it. It would also get you practice landlording on a smaller scale. If that's not an option, getting a side hustle to supplement income could also work. Best of luck!

Originally posted by @Abiola White :

How many rooms does it have ? Are you willing to rent per room or do airbnb ? Whats your market like, do renters want your type of home? Are you willing to take section 8 if you can cash flow? There are lots to consider, can you force equity with minor cosmetic upgrades to sell at break even or profit? Remember your VA loan goes up to $450k i think so you still have $240K of it you can leverage to purchase a duplex etc.

 3 rooms, with half the garage turned into an office/small room. It is a twin home, I am unaware of what the markets like. any tips on how I can research that? I am unfamiliar with section 8, but have not heard good things. Very true I forgot! I will look to see what I can do next, thank you for all the advice

Originally posted by @Jason Clarke :

Hey John. You may already know this, but it bears mentioning...if you refi with a conventional loan, i believe that'd require 20% down. If you don't have 20%, you'd pay  private mortgage insurance.  Either way, it may not result in an overall vast improvement to your cash flow or savings. 

I'm not sure of the various features of VA loans, but based on the post I'm guessing your limited on how much VA loans you can use. If thats true, it might be worth looking into getting a roommate (s) to subsidize your current mortgage and allow you to save more money quicker provided your living situation would allow it. It would also get you practice landlording on a smaller scale. If that's not an option, getting a side hustle to supplement income could also work. Best of luck!

 Thanks for the information! Wife has already expressed her feelings towards to roommates so unfortunately, that's not an option. My thoughts exactly, I have recently started applying to get a 2nd part time job 

You're probably not going to find a better rate than 3.75% and anything lower will be so insignificant that it won't make a dent in your payment (e.g. if you somehow magically found a 2.75% loan, you'd save only ~$116/month - nice, but not life changing).  And that's before we even consider any associated fees, which would cut into whatever savings you might find rate wise.  This is assuming you don't have $42k lying around to make up a conventional 20% loan down payment, which is really the only way you'd be able to lower your payment from what it is right now.  Honestly, refinancing 6 months after the purchase isn't really in play here.

Lest I leave you bummed out, here's the helpful stuff that you can look into:

The VA loan benefit is up to $424k for your area. You can have more than one VA loan, but the sum of the guarantee across all loans is $424k. So, since you bought for $210k, you have $214k of your benefit left. This post is a good primer on using the VA loan to build a rental portfolio.  Give it a read as a good starting off point.

Scenario 1 - Move out after a year, rent your current house and use the rest of your VA benefit to house hack

I'll assume you're not planning on moving out of the area, so we'll go with the "upgrade" possibility for a 2nd property in the same commuting area. You'll need to find a good mortgage broker with VA experience to figure out exactly what would qualify as an "upgrade" for your area. They can also help you figure out how long you may have to live in your current house until you can buy an "upgrade" - the rule of thumb is one year, but I haven't read the fine print of your mortgage agreement. I'm not a mortgage broker, nor do I play one on TV - search the forums for previous threads on VA loan and see if anybody's name continually pops up with useful advice then reach out to them.

Continuing my assumptions, let's say you find a duplex in your area for $300k. After consulting with your mortgage broker, you find out that it'd meet the requirements for an upgrade and you can qualify for the new mortgage in addition to your current mortgage. Your remaining VA benefit of $214k could be applied to this new mortgage, meaning you'd essentially combine a $214k, 0% down VA loan with a $84k, 20% down conventional loan to make up the $300k purchase price. That 20% would be $16,800 and we'll round it up to $20k to cover any closing costs. Precise numbers? No, but I think you get the idea.

You said you could get $1,700-1,800 as rent for your current property.  Let's take the lower end and say you rent it out for $1,700.  I'm assuming your mortgage of $1,515 includes taxes and insurance.  So, we'll estimate 10% of rents, each, for vacancy and maintenance reserves.  (Since you're open to house hacking, I'm assuming you're planning on managing the property yourself.  If not, add another 10%.)  That leaves us with monthly expenses of $1,855, which leaves you short $155 each month. (I recommend checking out the BP calculators and doing more research on your local market to get more precise numbers - I'm using general estimates that can be tweaked depending on the market.)

Disaster?!?!?!?! Not necessarily.  Don't forget you didn't put any money down on this property and you're now living in a duplex that brings in some additional income.  If you can cover that $155/month out of your personal budget and rental income from the other half of the duplex, you might decide it makes more sense to keep your first property running at a small loss for now and reap the other benefits of real estate: principle pay down, depreciation, future rent increases, etc.

Especially when you look at what it'd cost you to sell it at this point.  Since it's only been 6 months since purchase, I'm going to assume no appreciation.  You also have virtually zero equity.  Let's say, best case scenario, you're able to find a NJ realtor who charges you only 5% commission and is able to sell your property for the $210k you paid.  That's $10.5k owed to the realtor to move on from the property.  Viewed another way, that's 67 months of -$155 cash flow if you'd kept the property and rented it out instead.

I'm certainly not advising you to go out and buy another VA loan property with negative cash flow because you didn't put any money down up front, but playing woulda-coulda-shoulda gets you nowhere - you have the play the hand you have as best you can. You've learned that if you were to buy this property today as a rental, it wouldn't be a good deal. But, you may be able to make the most of your situation and move closer to your goals.

Is this exact scenario possible? Maybe. I don't know your market to know potential purchase prices, rental rates, your DTI for loan qualification purposes, what would qualify as an upgrade in your market for VA loan purposes, vacancy rates and expected maintenance costs in your market, etc. But I've hopefully done two thing: first, shown you how you need to run the numbers to make the best decision and second, given you some stuff to think about to consider how to get from where you are to where you want to be.

Scenario 2

Keep your primary home your primary home and save up to buy a rental property, either with conventional 20% down financing, a partnership, hard money BRRRR, etc.

Scenario 3

Not recommended. Come up with the money you'd need to sell your current home and start from scratch with a VA loan but buy a better deal.

John, I am not a licensed pro but I will share with you some of my thoughts as I'm AD as well and have been through this process a few times.  

Like Jason said, the VA to Conv refi is only possible (without paying PMI) if you are able to match a 20% down or have built up enough equity in the property that the LTV is less than 80%. Note if you use the equity approach, you will also have to take a negligible few grand cash out to show a derived benefit for the refi.

Also note if you do a VA IRRL (or any refi for that matter), there will still be closing costs and prepaid costs to process the refi. This will probably add roughly 5-15K onto the balance of your loan.

Assuming you qualify with your W-2, most counties in NJ for 2018 qualify for up to $679,650 VA loan(s). That (s) is significant because technically since you only used $210K on your first property, you still have about $470K VA capability that you could use on an additional property. You should be able to use about 75% of expected rental income on your current property to help you qualify for the additional leverage. I strongly recommend that you find a Central Jersey VA loan specialist, confirm/deny anything I have mentioned here and get a firm understanding of minimum timelines between VA loans too.

The monthly reduction of doing an IRRL now I believe would be negligible in increasing your cash flow. If I was in your shoes, I would first look into this option of tapping into the extra VA benefit that you have yet to utilize before doing another refi. Remember every "no cost" refi you execute will still pad your principal balance. Like you are thinking, if you find another good multi-unit property to house hack then you may be able to absorb the slim or negative margins of the current property and get back into the black.

Hope this helps some and good luck brother. 

Correction. Burlington Township does not fall in one of the 12 max counties in NJ. Your max VA benefit is $453,100.

I would pay more than the minimum on your mortgage payments so that you can pay off 20 percent on your home and then refinance into a conventional loan depending on the interest rates at that time. Perhaps you can rework your budget or add extra income to make large payments on your mortgage to accomplish this faster. Or continue making the minimum payments on your current home while aggressively saving money until you have saved up a 20% down payment for a rental home. Make sure you have a solid emergency fund and have done your research about rental rates before making your rental home purchase.

Originally posted by @John Jimenez :
Originally posted by @Jason Clarke:

Hey John. You may already know this, but it bears mentioning...if you refi with a conventional loan, i believe that'd require 20% down. If you don't have 20%, you'd pay  private mortgage insurance.  Either way, it may not result in an overall vast improvement to your cash flow or savings. 

I'm not sure of the various features of VA loans, but based on the post I'm guessing your limited on how much VA loans you can use. If thats true, it might be worth looking into getting a roommate (s) to subsidize your current mortgage and allow you to save more money quicker provided your living situation would allow it. It would also get you practice landlording on a smaller scale. If that's not an option, getting a side hustle to supplement income could also work. Best of luck!

 Thanks for the information! Wife has already expressed her feelings towards to roommates so unfortunately, that's not an option. My thoughts exactly, I have recently started applying to get a 2nd part time job 

This post has been removed.

Nice! Good luck w/your journey. If possible, getting a part-time job that would serve dual purposes of income & benefit to REI (Home Depot, Prop Mgt, handyman, etc.) might be a good play. Maybe something that allows you to network, establish connections, learn the business or aspects thereof.

Originally posted by @Kevin Touw :

You're probably not going to find a better rate than 3.75% and anything lower will be so insignificant that it won't make a dent in your payment (e.g. if you somehow magically found a 2.75% loan, you'd save only ~$116/month - nice, but not life changing).  And that's before we even consider any associated fees, which would cut into whatever savings you might find rate wise.  This is assuming you don't have $42k lying around to make up a conventional 20% loan down payment, which is really the only way you'd be able to lower your payment from what it is right now.  Honestly, refinancing 6 months after the purchase isn't really in play here.

Lest I leave you bummed out, here's the helpful stuff that you can look into:

The VA loan benefit is up to $424k for your area. You can have more than one VA loan, but the sum of the guarantee across all loans is $424k. So, since you bought for $210k, you have $214k of your benefit left. This post is a good primer on using the VA loan to build a rental portfolio.  Give it a read as a good starting off point.

Scenario 1 - Move out after a year, rent your current house and use the rest of your VA benefit to house hack

I'll assume you're not planning on moving out of the area, so we'll go with the "upgrade" possibility for a 2nd property in the same commuting area. You'll need to find a good mortgage broker with VA experience to figure out exactly what would qualify as an "upgrade" for your area. They can also help you figure out how long you may have to live in your current house until you can buy an "upgrade" - the rule of thumb is one year, but I haven't read the fine print of your mortgage agreement. I'm not a mortgage broker, nor do I play one on TV - search the forums for previous threads on VA loan and see if anybody's name continually pops up with useful advice then reach out to them.

Continuing my assumptions, let's say you find a duplex in your area for $300k. After consulting with your mortgage broker, you find out that it'd meet the requirements for an upgrade and you can qualify for the new mortgage in addition to your current mortgage. Your remaining VA benefit of $214k could be applied to this new mortgage, meaning you'd essentially combine a $214k, 0% down VA loan with a $84k, 20% down conventional loan to make up the $300k purchase price. That 20% would be $16,800 and we'll round it up to $20k to cover any closing costs. Precise numbers? No, but I think you get the idea.

You said you could get $1,700-1,800 as rent for your current property.  Let's take the lower end and say you rent it out for $1,700.  I'm assuming your mortgage of $1,515 includes taxes and insurance.  So, we'll estimate 10% of rents, each, for vacancy and maintenance reserves.  (Since you're open to house hacking, I'm assuming you're planning on managing the property yourself.  If not, add another 10%.)  That leaves us with monthly expenses of $1,855, which leaves you short $155 each month. (I recommend checking out the BP calculators and doing more research on your local market to get more precise numbers - I'm using general estimates that can be tweaked depending on the market.)

Disaster?!?!?!?! Not necessarily.  Don't forget you didn't put any money down on this property and you're now living in a duplex that brings in some additional income.  If you can cover that $155/month out of your personal budget and rental income from the other half of the duplex, you might decide it makes more sense to keep your first property running at a small loss for now and reap the other benefits of real estate: principle pay down, depreciation, future rent increases, etc.

Especially when you look at what it'd cost you to sell it at this point.  Since it's only been 6 months since purchase, I'm going to assume no appreciation.  You also have virtually zero equity.  Let's say, best case scenario, you're able to find a NJ realtor who charges you only 5% commission and is able to sell your property for the $210k you paid.  That's $10.5k owed to the realtor to move on from the property.  Viewed another way, that's 67 months of -$155 cash flow if you'd kept the property and rented it out instead.

I'm certainly not advising you to go out and buy another VA loan property with negative cash flow because you didn't put any money down up front, but playing woulda-coulda-shoulda gets you nowhere - you have the play the hand you have as best you can. You've learned that if you were to buy this property today as a rental, it wouldn't be a good deal. But, you may be able to make the most of your situation and move closer to your goals.

Is this exact scenario possible? Maybe. I don't know your market to know potential purchase prices, rental rates, your DTI for loan qualification purposes, what would qualify as an upgrade in your market for VA loan purposes, vacancy rates and expected maintenance costs in your market, etc. But I've hopefully done two thing: first, shown you how you need to run the numbers to make the best decision and second, given you some stuff to think about to consider how to get from where you are to where you want to be.

Scenario 2

Keep your primary home your primary home and save up to buy a rental property, either with conventional 20% down financing, a partnership, hard money BRRRR, etc.

Scenario 3

Not recommended. Come up with the money you'd need to sell your current home and start from scratch with a VA loan but buy a better deal.

 Wow, Thank you Kevin, for all the potential scenarios. You really helped lay it out for me, and I truly appreciate it. I will more than likely be following scenario 1 this one seems like it's the best option for me depending on the deal I get for the second property.

Originally posted by @Matthew Rayl :

Correction. Burlington Township does not fall in one of the 12 max counties in NJ. Your max VA benefit is $453,100.

 I wasn't aware of this extra amount of benefit I had left! If I purchased a home in one of the 12 max counties would this raise my benefit? Also, would you please mind sharing where you found this information? Thanks again for giving me such helpful advice, I will be staying away from refinancing.

Originally posted by @Jason Clarke :

Nice! Good luck w/your journey. If possible, getting a part-time job that would serve dual purposes of income & benefit to REI (Home Depot, Prop Mgt, handyman, etc.) might be a good play. Maybe something that allows you to network, establish connections, learn the business or aspects thereof.

 Oh wow. Great idea, here I am applying at Starbucks and other similar places.

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