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A common question that Veterans have is “My rate is higher than what I see being advertised, but I might move in the next few years. Should I refinance?”

This is a great question and the answer is “It depends!” I know that is not the answer some people might want to hear, but it really does depend on a handful of factors:

• What is your current interest rate?
• When do you realistically think you will move?
• If you do move, will you consider renting this current home?
• Is saving money now more important that having a little extra equity or cash in your pocket when you sale?

These, along with others, are questions that need to be asked and answered honestly. The life of a Veteran can be hectic at times. The job can take you to places you didn’t expect at times you didn’t expect. So answering some of the questions may be a little difficult.

The saying “If you save at least 1% on your interest rate when you refinance, then it is a worth doing” is a common rule of thumb that a lot of Veterans go by. At first glance that does make sense but it is all relative, especially when you may move soon.

In my mind, it really comes down to the “Break Even” of the closing costs. Basically, how long is it going to take you to recoup the closing costs that were charged for you to get the loan based on the savings that you were able to get? You might save the magical 1% on your interest rate and save $100/month, but if it cost you $7,000 in closing cost to get that loan then you break even is 70 months. If you are going to move in 3 years this might not be the best loan for you, even though you saved the 1%.

So instead of getting caught up on saving a certain percentage on the loan, a Veteran would be better served to answer the above questions as accurately as possible and then shop for an interest rate-closing cost combination that has a break even before the “move/sale date” of the home.

Understanding how interest rates and closing costs work will help you find a loan that makes sense. Most loan officers don’t take the time to explain or maybe don’t even want the Veteran or home owner to understand how the relationship of the interest rate and closing costs works.

Basically, the lower the rate you go the more the closing costs are going to be. If you take a slightly higher rate the costs will be less. As you go still higher with the rate, the bank starts to pay the loan officer for giving you that rate. So there is a balance of the rate actually costing the loan officer (you have to pay discount points), the rate being “par” (doesn’t cost the loan officer), and the rate starting to pay the loan officer money.

An ethical loan officer that specializes in VA Loans will take the time to explain this balancing act of rates and costs and will help you match up a loan scenario that will make sense for your remaining time frame in the home.

If you have a short time frame left in the home but need some immediate savings and the ability to not have to make the next 1-2 mortgage payments, a higher interest rate than what might be advertised can make a lot of sense.

For example, the lowest rate advertised is always going to be the most expensive. You are going to have to pay discount points to get that. Let’s say that rate is 4.75%. If you went a little higher to 5.0% that may be the par rate, and still higher 5.25% is paying the loan officer. It might make the most financial sense to take the higher rate. You will pay a lot less in closing costs and have a refinance that makes sense.

In summary, knowing your personal time frame in the home and financial needs before you start shopping for a VA refinance will have you prepared to make the right financial decision. Don’t make the mistake of turning down a loan because the low rate has too much closing costs but the higher rate isn’t the magical “1% savings”. Sometimes saving.5% or.75% on your rate can be a much better refinance.