One of the more popular VA loan refinance options is the VA IRRRL program. The VA IRRRL is also known as the VA streamline refinance. The IRRRL loan is abbreviated as Interest Rate Reduction Refinance Loan. The VA IRRRL is used to refinance one mortgage into another, to reduce your current rate into a new lower rate, and in most cases a lower monthly mortgage payment. Also with the IRRRL program, you can move from an adjustable-rate loan to a fixed-rate loan. The IRRRL program offers current veteran homeowners an excellent opportunity to take advantage of low-interest rates with the backing of the VA. The IRRRL again is also known as the VA streamline is exactly that, a streamlined process to refinancing your current mortgage. The VA has made this an easy process for veterans to help them save money and get a lower interest rate.
How Does the VA IRRRL Work?
Now we know the basics of the VA loan IRRRL but how does it work? In the VA loan program, there is a streamline refinance option called the VA IRRRL. As you can probably tell from the name, the VA’s streamline refinance option is intended for veteran borrowers who just want a lower interest rate on their mortgage. Getting a lower interest rate is good for two reasons: it saves you money over the life of the loan, and it saves you money every month because a smaller monthly payment will still be fully-amortizing.
VA IRRRL Rates
Interest rates are probably what got you started down this path, so let’s begin there. VA IRRRL rates have stayed desirable throughout 2019 and should continue into 2020. Interest rates are based on many factors, so they can change daily. Actions by the Federal Reserve, the state of the economy and world events all have an impact.
A rate that’s a full percentage point below your current mortgage will give you the most benefit. A $150,000 loan at 5% interest will cost $805.23 per month. At 4%, that payment goes down to $716.12, saving you almost $90/month. As you can see, it pays to shop around.
The VA Interest Rate Reduction Refinance Loan, known as the IRRRL, is a program offered to anyone who already has a VA home loan. This loan is also called a VA Streamline because the process is designed to be quick and easy. In fact, you can generally apply and close in under 30 days, whereas a traditional refinance can take upwards of 45 days. It’s intended to be an efficient way for you to replace your current VA loan with a new, lower interest rate loan. This, in turn, would lower your monthly payment. The VA IRRRL is also a useful way to move from an adjustable rate mortgage to a fixed-rate loan. Sound good?
Let’s get you more information. Like any refinance, you should also make sure the benefits outweigh the costs involved. There are always costs associated with refinancing your mortgage, including closing costs and the VA Funding Fee. You may even opt to pay for something called points to further lower your interest rate. The good news is that all you can roll all these fees into the loan itself. That saves you from having to put out any cash to take advantage of the program. So, what are the VA IRRRL allowable closing costs and prepaids?
VA IRRRL Benefits
After all that, you’ve decided you are on board. What are the VA IRRRL benefits anyway? We’ve already talked about how super quick and easy this loan is. But what does that mean for you? A whole lot less hassle. You’ve already gone through most of the red tape when you applied for your VA purchase loan. You have your Certificate of Eligibility, you’ve done the credit process and you have the home appraisal. Since you aren’t allowed to take any additional cash out with this loan, there isn’t any need to revisit that. You don’t need to go through another credit check OR have another appraisal done on your home. That is a huge time saver.
It’s worth mentioning again that you do not need any upfront cash to refinance using the IRRRL program. All loan costs can be rolled into the loan. Keep in mind that when you do that, you will be paying interest on those costs, as it does add to the loan balance. Most people find that an acceptable trade-off to realize the lower monthly payment.
People with an adjustable rate mortgage can also take advantage of moving to a fixed-rate loan with an IRRRL. When you’re mortgage is adjustable, your payment can go up without warning making meeting monthly expenses difficult. This is the only instance where refinancing may actually increase your interest rate. The best thing about going this route is being able to lock in your interest rate. Having the stability of knowing that your payments will not change throughout the life of the loan can give you a lot of peace of mind.
What about occupancy? When you applied for your purchase loan, you had to prove eight ways to Sunday that this home was to be your primary residence. The VA knows this was intent, not hard fact – sometimes circumstances change. To qualify for an IRRRL, all you have to do is certify that you previously occupied the property…not that you currently do. This is a huge advantage especially for active service members. Often they will buy a house only to receive a Permanent Change of Station (PCS) order. The IRRRL, vies the service member the option to quickly refinance their home so they can rent it out rather than sell it.
There’s one more benefit we haven’t talked about. While you are never allowed to take any cash out of an IRRRL, you can add up to $6,000 in Energy Efficient Improvements to you home. You can add insulation, or put on new doors and windows. Programmable thermostats and upgraded HVAC equipment would also qualify. You can have this work done either before or after closing. If you pay out of pocket, the lender will need proof of payment, and you have 90 days from the date of services to get reimbursed for the costs. A small word of caution on using this benefit. One of the draws VA loans offer is the ability to finance 100% of your home’s worth. Using this extra $6,000 could make your mortgage balance more than the cost of your home, which could make selling your home challenging down the line.
How do you go about choosing the best VA lender? If you are happy with your current lender, that would be a great place to start. However, with the way interest rates work, different lenders can offer different rates. Shopping around is important, it could save you hundreds or possibly thousands of dollars over the life of the loan. You also need to be aware of predatory lending. The Consumer Financial Protection Bureau and the VA have issued their first warning order to service members and Veterans with a VA home loan. There has been an uptick of unsolicited offers sent to unsuspecting homeowners promising cash back, skipped mortgage payments and super low interest rates. These lenders can be aggressive and use misleading advertising tactics to lure you in. To read what the VA has to say about this situation, click here.
IRRRL Closing Costs
VA IRRRL closing costs who pays them and how much are they? Closing costs are comprised of various services lenders charge as they process your loan. These charges include recording fees, flood zone determination, title insurance fees, prepaid taxes and hazard insurance. It also includes the Loan Origination Fee, which is not allowed to exceed 1% of the total amount of the IRRRL. The origination fee is another lump sum lenders use to combine administration fees. These include notary, application and processing, document preparation, loan closing and more.
VA IRRRL Funding fee
The VA IRRRL Funding Fee is another fee added to the cost of refinancing under this program. The funding fee is there to reduce the cost of the program to taxpayers considering that there is no down payment or Private Mortgage Insurance associated with VA loan programs. You also paid this fee when you got your original purchase loan. It’s calculated using a percentage of the total amount of the loan. That percentage is determined on several factors, such as whether you choose to make a voluntary down payment, whether you’re a first time user, or your military category. For example, National Guard and Reserve members pay a slightly higher funding fee than full time service members. You can read more about VA IRRRL Funding Fee details here.
Refinance Break Even Point
So with these extra costs added on, how do you determine whether the IRRRL is worth it? You’ll want to figure out your break-even point. In other words, how long will it take you to recoup the closing costs and the funding fee based on the monthly savings you receive after closing? Let’s look at the example from earlier in this article. Your current loan is $150,000 at 5% interest, costing $805.23/month. Your IRRRL will be $150,000 at 4%, lowering your payment to $716.12/month. You save $86.11/month. If your total closing costs are $2,500, divide that by the $86.11. It will take you 29 months to recoup the amount you added to your loan for closing costs. If you are planning to live in your current house for another 2.5 years, you will be ahead of the game.
2018 VA IRRRL Changes
The VA IRRRL has gone through a few changes in 2018 due to what is called mortgage churning. Mortgage churning is a practice of targeting veteran homeowners to convince them to refinance in a short period of time. These new rule changes have been made to protect veterans from these predatory lending practices.
- A seasoning period of at least 6 months
- Sufficient benefit terms of dropping at least half a percentage point when refinancing on a fixed rate mortgage
- Sufficient benefit terms of dropping two percentage points when refinancing on a Adjustable Rate Mortgage
- You must be able to recoup your closing costs in 36 months
VA IRRRL Eligibility
To be eligible for a VA streamline refinance loan there are a few things to keep in mind. You must be a veteran that owns your home. You must have a VA loan. This is what helps with the VA streamline process. By having a previous VA loan the loan information is transferred over helping to reduce the paperwork significantly on the VA IRRRL. You can still convert your loan to a VA loan if you currently have an FHA or conventional loan however there might be more paperwork involved and a higher VA funding fee depending on your situation.
- Current mortgage must be a VA loan
- Must be a veteran homeowner
- No Fico Restrictions
- No need for an appraisal
- No lender fee
- No Mortgage Insurance
- No LTV restrictions
- No loan limits
The Interest Rate Reduction Loan is an easy program. It is also know as the VA streamline. This VA refinance option is a benefit designed to help veteran homeowners reduce their interest rate in a quick and simplified manner by reducing the amount of paperwork. The VA IRRRL has helped many veterans save money while lowering their interest rate and in most cases decreasing their monthly mortgage payments. Let’s take a closer look at the IRRRL program pros and cons.
First lets start with the pros. There are more pros than cons when it comes to the VA IRRRL program. Remember the IRRRL was designed to help veterans save money and lower their interest rate with a fast streamlined application process. If you are a veteran home owner with a higher interest rate you might want to consider a VA IRRRL. If you have questions about your situation and would like to speak with a licensed VA lender call 855-956-4040.
How do I Qualify for a VA IRRRL?Qualifying for the VA IRRRL program basically has two main factors. If you are a current homeowner that used your VA benefits to purchase your home chances are, if you qualified for a VA loan in the first place, then you are qualified for the IRRRL program. That being said there are a few exceptions to this, and requirements can vary, but generally speaking, that is the case. The second factor is your current situation. If the IRRRL benefits your current situation and it makes sense then there is usually no problem. If the Interest Rate Reduction Refinance Loan is something that you would like to consider the best thing to do is call 855-956-4040 to talk to a VA mortgage specialist.
If you’ve gotten married since you got your VA loan, and are wanting to add your new spouse as an obligor on the loan, you may be able to use an IRRRL to do so but it will at least need to be submitted for prior approval to the VA, and will not be nearly as “streamlined” as it would be otherwise. The same is true for a divorce where one or more of the obligors are getting taken off the loan. In cases of joint VA loans where the obligors change, an IRRRL is usually not possible. This is one way that your situation can disqualify you from being able to use an IRRRL to refinance your loan. In these cases, you will need to use a standard refinance to update your mortgage. A change of obligors is not the only situational variable that affects your ability to use an IRRRL.
If you are needing to get cash-out on your refinance for any purpose other than energy efficient improvements to your home, you will not be able to use an IRRRL to do it. While this isn’t strictly to do with “qualifying” since it’s completely up to you, it is something that can narrow down the possible situations where you can feasibly use an IRRRL. The best use for an IRRRL is to secure a lower interest rate. When you start to try to use an IRRRL for other purposes, it can be hit and miss as to whether you’ll be able to or not. The last points we’ll cover are the VA’s “benefit to borrower” guidelines that affect whether or not you can get an IRRRL.
The VA requires that an IRRRL results in a net benefit to the borrower. They require that your interest rate must lower as a result of the IRRRL unless you are going from an ARM to a fixed-rate mortgage. ARM loan interest rates are calculated differently, and are often lower than their fixed-rate counterparts. The VA also requires that your principal and interest payment becomes lower (which usually happens by default when the interest rate lowers), or the remaining term on the loan must decrease. Even if you secure a lower interest rate, your payment might get higher if you choose a shorter term, since you’re paying off more principal each month.
If you would like to learn more about the VA IRRRL program and see if you qualify call (855) 956-4040 to speak with a licensed VA loan specialist.