Anytime you are thinking about refinancing, it’s a good idea to look at the pros and cons. Not only of refinancing in general, but also the VA IRRRL Program pros and cons. You hear people talking about refinancing their mortgages every day. You see ads and read advertisements. Friends and co-workers talk about getting lower rates and moan about gathering paperwork. You’ve heard interest rates are going down, but you have a VA loan, so you don’t know what your options are. Is there anything you can do? Absolutely! If you’re looking to lower your monthly mortgage payment, interest rate and maybe even your loan term, the VA IRRRL Program may be what you’re looking for.
VA Streamline Refinance Pros and Cons
- Lower Interest Rate
- Fast & Easy
- No Income Documents
Interest rates are probably what got you started down this path, so let’s begin there. VA IRRRL rates have stayed desirable throughout 2019. The VA recommends you shop around to several lenders to make sure you find the lowest interest rates available. 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. It 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 loan 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.
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 the VA Funding Fee here [link to article I have yet to write].
What if you want to pay points to further lower your interest rate? For each point you buy, your interest rate goes down a quarter of a percent. The IRRRL program allows you to buy as many points as you like, but you can only roll the cost of two points into the final amount of the loan.
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.
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.
The VA hit it out of the park with this program. They made it as easy as possible for you to refinance your current VA loan with as little stress as possible. We hope this article has helped serve as a small VA IRRRL checklist. You know the benefits, what to watch out for and how to know if it will work for you. If you would like more information, please call 855-956-4040 to speak to one of our specialists.