With a VA loan, the United States Department of Veterans Affairs requires that the closing costs on a VA refinance be recouped in 36 months or less. If the recoupment period is over 36 months the loan will be rejected.
In other words, the refinance closing costs divided by the monthly savings has to be 36 or less, signifying the number of months in the recoupment period.
For example, if the closing costs on a VA refinance are $3,000 and the monthly savings on the refinance are $400 a month, the recoupment period is 7.5 months because $3,000 divided by $400 a month in savings = 7.5 (well within 36 months).
If the closing costs on a VA refinance are $3,000 and the monthly savings on the refinance are $200 a month, then the recoupment period is 15 months ($3,000 divided by $200 a month in savings = 15) which is within 36 months.
If the closing costs on a VA refinance are $5,000 and the monthly savings on the refinance are $125 a month, then this will not be approved since the recoupment period is 40 months. $5,000 divided by $125 a month in savings = 40.
The Department of Veterans Affairs would say the last scenario has closing costs that are too high and an insufficient monthly savings for a VA refinance loan.
It is important to realize that the Department of Veterans Affairs has this recoupment period limit of 36 months when considering your VA refinance.