VA home loans already bring such benefits as lower down payments, no mortgage insurance, and low interest rates, but what happens when rates drop even lower? Today's mortgage rates are the lowest in history. How can VA homeowners benefit?
Hello, my name is IRRRL.
Interest Rate Reduction Refinancing Loans
An IRRRL is a mortgage product offered by the U.S. Department of Veterans Affairs (VA) to veterans and military families. The loan goes by other names, such as a VA streamline refinance and a VA-to-VA loan.
The primary features of this refi product are speed and simplicity. Qualifications are minimal. You must meet these three requirements.
- You already have a VA-backed home loan.
- You are using the IRRRL to refinance your existing VA-backed home loan.
- You can certify that you currently live in, or used to live in, the home covered by this loan.
Homeowners who already hold a VA loan can, with minimal paperwork, refinance to a lower rate, a shorter term, or both. Even better, they can use the IRRRL to convert from a volatile adjustable-rate mortgage (ARM) into a predictable fixed-rate mortgage.
VA refinance loans had an average interest rage of 2.92% and an APR of 3.13% for a 30-year refi as of Aug. 25, 2020, according to a national survey by Bankrate.
How the VA Streamline Refinance Program Works
Refinancing in general is almost always faster and easier than qualifying for a mortgage in the first place, and this is especially true with the VA Streamline Refinance Program. No need to meet a minimum credit score. No need for a new Certificate of Eligibility. No minimum income, and also no maximum income; that is, holders of VA loans are eligible to refinance to a more affordable and predictable loan no matter how much money they make.
Just as you did for the initial VA home loan, you go through a bank, a mortgage company, or a credit union for an IRRRL. The Veterans Administration backs such loans; it does not issue them itself. As always, watch out for refinancing offers that sound too good to be true, such as the ones that say you can skip payments. The VA offers tips for spotting sketchy refi lenders here.
VA Funding Fee
VA streamline refinance loans typically have no out-of-pocket costs at the time of closing. On the other hand, a VA funding fee must be paid, like it was when the initial VA mortgage was acquired. For your first use of the IRRRL program, the VA funding fee is 2.3% of the amount borrowed, per Bankrate. For subsequent uses of the program (with some exceptions), the fee rises to 3.6%.
You may be exempt from paying a VA funding fee if you are:
- Disabled and receiving VA compensation for your service-related disability.
- Receiving military retirement pay in lieu of service-connected disability benefits.
- On active duty and received the Purple Heart, which you must document before or at loan closing.
- Eligible to receive compensation as the result of a pre-discharge, and you presented the paperwork before closing.
- A surviving military spouse whose partner died from a service-related disability or died in service, and you are receiving Dependency and Indemnity Compensation.
Closing Costs
The funding fee and other closing costs of a VA rate reduction loan can be rolled into the loan amount. This is a painless way to dispatch with them up front, but you will pay interest on those closing costs, making them much more expensive in the end. Some lenders will waive the closing costs if you agree to a slightly higher interest rate.
Give careful consideration to closing costs when deciding whether an IRRRL will be worth it to you.
Some lenders offer IRRRLs as an opportunity to move from a 30-year mortgage to 15 years, which saves you considerable money in interest. Just beware of making your new monthly payment uncomfortably high.
Will an IRRRL Be Worth It?
The two primary reasons to take advantage of an interest rate reduction refinancing loan are (1) to lower your monthly payment by getting a lower interest rate; or (2) to make your payments more comfortable and predictable by moving from a scary ARM to a fixed rate. Whatever your motivation, weigh the benefits against the closing costs to determine whether proceeding with a VA rate reduction would be worth it.
To Get a Lower Payment
Before moving ahead with a refinance, do a little simple math. Let's say you are thinking of moving from one VA-backed fixed-rate mortgage to another with a lower interest rate. Write down what the closing costs would be and what you expect to save each month from refinancing. Divide the closing costs by the monthly savings. That tells you how many months it will take before the savings has offset the costs and you actually start saving.
Some lenders may contact you suggesting that they are the only lender with authority to make IRRRLs. Remember: Any lender may make you an IRRRL. —Military.com
To Escape an ARM
The second scenario involves more than just dollar amounts. Let's say you want to ditch the unpredictable monthly payments of an adjustable-rate mortgage and get a more comfortable fixed-rate mortgage. Especially today when rates are rock-bottom, why not ditch the ARM and lock in a low rate? An IRRRL could be worthwhile even if it takes many years before you break even in terms of the monthly savings versus the closing costs. Stability and predictability have value too.
Takeaways
- VA loan holders can refinance quickly and easily with an IRRRL.
- Make your first IRRRL count because the program becomes more expensive with subsequent use.
- As always, watch out for refi deals that sound too good to be true.
