Should Veterans Buy Now and Refi with a VA Streamline When Rates Drop?

When mortgage rates rise sharply, a curious mantra resurfaces: “Marry the house, date the rate.”

The concept is that when you find a house you love, you buy it with the expectation that rates will drop and you can refinance.

Is this a good tactic for veterans and active-duty service members? Before saying “I do” to this homebuying strategy, let’s examine its merits and drawbacks.

What Does It Mean To “Date The Rate, Marry The House”?

By dating the rate and marrying the house, homebuyers are encouraged to prioritize investing in a property that meets their needs and has the potential for long-term financial stability instead of waiting to buy until rates drop.

Essentially, you “marry” a house by choosing one with lasting qualities that suit your lifestyle. Then, you “date” the rate by obtaining the best available interest rate at the time of purchase, with the option to refinance later when rates drop and better align with your financial goals.

Is Dating The Rate Good Advice For Veterans And Active-Duty Service Members?

Advocates of the rate-dating strategy would say yes, this notion is great advice even if interest rates don’t come down.

Consider the following two scenarios. The first one shows someone who expects to have the interest rate long-term. The second is an example of marrying the house while expecting to refinance soon.

Scenario #1

John and Jane Homebuyer decide to hold off on purchasing a home due to 7% interest rates. Instead, they choose to wait things out, anticipating rates will drop back down to at least 6%. But rates never come down below 7% and they end up renting for the next five years.

Scenario #2

John and Jane choose to buy a home today for $450,000. They put $50,000 down and finance a loan amount of $400,000 at 7%. Rates never drop below 7%. In comparing the difference of an interest rate of 6% vs 7%, the amount of interest paid over five years would be nearly $20,000.  

Here’s why supporters say this second scenario still makes sense. Using the U.S. average annual home appreciation rate of 4%, in five years that $450,000 home would be worth $547,494. That’s an increase of over $97,000.

Even though they paid $20K more in interest, the net positive is $77,000 in equity.

When “Date The Rate” Becomes Bad Advice

Can you buy a home now and refinance it later? Yes. Does it always make sense to do so? Not necessarily.

While home prices have historically risen over time, this isn’t always the case. The housing market crash of 2008 resulted in significant depreciation, leaving many homeowners with upside equity and, for some, the loss of their homes and investments.

Even though most experts don’t expect a repeat of 2008, history has a way of repeating itself and real estate is no exception.

Another potential issue to consider is this: overpaying. Let’s say you find your dream home and it’s listed for $450,000. Because other homebuyers see this same home as their dream home, a bidding war ensues, and you end up offering 5% over the asking price, or $472,500.

With “date the rate” logic, interest rates will drop, allowing you to refinance to a more affordable payment. But what if rates fail to drop and the housing market softens as well?

The result is that you potentially overpaid for your home in a market where home prices declined and rates never fell.  

How The VA IRRRL Can Influence Dating The Rate

Veterans and active-duty service members have an advantage when refinancing: the VA IRRRL (Interest Rate Reduction Refinance Loan), also known as the VA Streamline Refinance.

The VA Streamline Refinance offers distinct advantages over other types of refinance loans. Here’s why.

Usually, no appraisal or income documentation is needed for a VA IRRRL. There are no credit underwriting rules, either, except that you’ve paid the mortgage on time.

For non-veteran homeowners, if their income has decreased, their credit scores dropped, or their home has declined in value, they may not be able to refinance to take advantage of lower mortgage rates.

Conversely, as a veteran or active-duty service member with lower income, lower credit scores and/or home depreciation, you may still be able to refinance to a lower rate and monthly payment. 

In short, a VA IRRRL takes some of the risk out of the rate-dating strategy.

How Much Do Rates Need To Drop Before It Makes Sense For Veterans To Refinance?

Interest rates play the biggest role when it comes to being able to refinance to a lower payment.

The general rule of thumb is to aim for at least a one percent lower interest rate before refinancing. Naturally, the larger the rate reduction, the quicker you’ll recoup your refinancing costs and the more you’ll save.

But it’s not just about comparing your current rate to the rate you could get if you refinance. To know if refinancing is worth it, you’ll need to know the answers to at least two important questions.

1.      How long do you intend to be in your home?

2.      What are the costs associated with refinancing?

According to the National Association of Realtors, the average homeowner moves to a different home after just 10 years. But if you only plan to own your home for a short period, refinancing may not make good financial sense.

Be sure to do the math on savings vs costs. Even though you can typically roll closing costs and funding fees into VA IRRRLs, adding those fees back into your new loan increases the total amount you’ll accrue in interest.

Other Important Considerations For Veterans

Even with the ease and convenience of the VA IRRRL, refinancing isn’t always the best financial move. Other factors should be considered.  

Closing Costs. Although VA Streamline Refinance loans typically have lower closing costs and lower funding fees, refinancing isn’t free. Do the math to figure out if the savings and lower rate offset the costs of refinancing.  

Longer Term. Refinancing to a new 30-year loan term means you’ll be making mortgage payments for a longer period. Even if your rate is lower and your payments are less, depending on how long you’ll be in the home could mean you’ll pay more by refinancing, especially after adding the closing costs and additional interest payments.

Shorter Term. Refinancing to a shorter term avoids extending the term, but your monthly payments are likely to increase. A lower interest rate on a 15-year term may not result in the benefits you were hoping for.

Higher Rates. Remember, there’s no guarantee that interest rates are going to drop. If you buy a home that’s slightly out of your comfort zone with the idea that your payments will be easier to manage when rates come down, you may be left outside of your comfort zone indefinitely.

Waiting Period. To qualify for a VA IRRRL, you’ll need to wait 210 days (7 months) after making your first payment on your current loan. Some lenders have additional requirements that require a waiting period of up to 12 months.

Should You Buy with Hopes to Refinance With A VA IRRRL?

While the “marry the house, date the rate” strategy may work for some veterans and active-duty service members, it’s not the best move for everyone.

If you do opt for this strategy, make sure you’re comfortable with your rate and payment. Though refinancing may be an option later, there’s no guarantee rates will drop while you’re in the home.

Speak with a mortgage professional to find out if this technique is right for you and your situation.