It’s no secret that the primary reason most people choose to refinance their home loans is to take advantage of lower interest rates, which, in turn, shaves off a slice of their mortgage payments. Veterans and active military holding VA-backed home loans and who are looking to find some extra cash at the end of the month might consider an Interest Rate Reduction Refinance Loan (IRRRL), sometimes referred to as a streamline refinance loan because, as its name implies, it offers a hassle-free refi process.
5 Reasons Lenders and Borrowers Like IRRRLs
- Borrowers don’t endure the standard VA lender underwriting process
- The home doesn’t require an appraisal
- Borrowers have the option to roll closing costs into their loan
- There’s often little to no out-of-pocket costs to the borrower
- An IRRRL replaces a current VA loan with a new one under different terms, allowing for lower monthly payments through reduced interest rates
To alleviate any skepticism, you should note that this simplified refinance must meet VA requirements offering veterans a Net Tangible Benefit (NTB), meaning that the new loan is in the best financial interest of the borrower. For instance, the IRRRL needs to provide a lower interest rate or lower monthly payment.
Will a VA IRRRL Change My Adjustable Rate Mortgage (ARM) to a Fixed Rate?
That’s a resounding yes. In fact, the IRRRL refinancing an ARM to a fixed-rate mortgage satisfies another tenant of the NTB. Using a VA IRRRL to swap an adjustable-rate mortgage for a fixed-rate loan allows you to lock in a rate for the life of your loan so that you never have to lose sleep over future mortgage rate hikes.
Some borrowers will use a VA IRRRL to increase their monthly mortgage payments because they choose to transition from a 30-year to a 15-year mortgage. Sure, their payments are higher, but not only do they save a substantial amount of interest throughout the loan, but they get to own their homes outright 15 years sooner.
This method isn’t ideal for everyone, but the VA loan professionals at Aligned Mortgage will gladly work with you and help you figure out if a shorter loan is feasible within your budget.
Can I Get Cash-Out With An IRRRL?
Sorry, but there are no cash-out options with an IRRRL. Okay, now that we’ve gotten the bad news out of the way, as with just about everything, there’s one exception. You can use the Energy Improvement Mortgage (EIM) option with any VA refinance product, including IRRRL. With an EIM, you can add the cost of select energy-efficient improvements — up to $6,000 — to your refinance loan package. The energy improvements must be permanent to qualify, so adding a couple of window air conditioners or fancy appliances won’t count. Long-term improvements, including insulation, energy-efficient windows and doors, and programmable thermostats are acceptable. You’ll be subject to an energy audit after six months, and there may be additional underwriting requirements. However, your VA lending professional at Aligned Mortgage will gladly go over the details and help you weigh the pros and cons to see whether the EIM option is beneficial to your particular circumstances.
Are There Any IRRRL Restrictions or Requirements?
Remember, you can use an IRRRL only to refinance a property with an existing VA loan, meaning that it must be a VA-to-VA loan, not for first-time homebuyers.
If you qualify to refinance a VA mortgage using the IRRRL, there are fewer restrictions on how you can use the loan. However, you still need to prove eligibility by providing the Certificate of Eligibility or COE. That’s not a big deal because your lender can easily pull a COE for you. Another plus is that you can use an IRRRL to refinance a house you’re not currently occupying. As long as you can certify that you previously lived there, you’re eligible to use the IRRRL. So, if you’ve got a rental property that you once lived in, it qualifies.
Is There a Funding Fee to Refinance a VA Mortgage Using a VA IRRRL?
Yes, most VA streamline borrowers who refinance a VA mortgage will pay a 0.5 percent funding fee. However, as with a VA loan, the funding fee is waived for specific borrowers with service-connected disabilities, as well as surviving spouses who qualify.
You should note, though, that you can get an IRRRL without paying anything out-of-pocket by financing the closing costs. Instead, you’ll end up paying the costs over an extended period. If you’re unsure whether an IRRRL is the best option for you, contact your Aligned Mortgage loan officer for more information specific to your situation.
Aligned Mortgage offers a free VA Home Loan Buying Seminar every month that explains the power of your VA home loan benefit. Join us On Demand, Live, or Online!