A Quick Way To Get A Better Rate – Forbes Advisor
A simplified VA refinance might be the easiest way to lower your interest rate when you have a VA mortgage. This type of refinancing usually does not require an appraisal, credit check, or underwriting, three things that normally cost borrowers money and time.
Streamline VA refinance rates are competitive with conventional loan refinance rate, too. While they have certain restrictions, like not allowing homeowners to touch their equity, they are meant to help eligible military service members enjoy affordable and stable home ownership.
What is a VA Interest Rate Reduction Refinance Loan (VA IRRRL)?
A Veterans Administration (VA IRRRL) Interest Rate Reduction Refinance Loan is a home loan that replaces your VA mortgage with a new loan on more favorable terms. You will also see this type of mortgage loan called VA simplified refinance.
The new loan could be more beneficial in several ways:
- It could give you a lower monthly payment by lowering your interest rate.
- This could give you a more stable monthly payment by getting you out of a adjustable rate mortgage (ARM) and a fixed rate mortgage.
- It could have a lower interest rate and a shorter duration, allowing you to get out of debt sooner and save money on interest on the long term.
If the new loan has a longer term, however, the new term cannot exceed 30 years plus 32 days, or 10 years longer than your original loan term, whichever is shorter. In other words, if the loan you are refinancing is a 15-year loan, you cannot refinance into a 30-year loan, but you can refinance into a 25-year loan.
Does VA allow homeowners to refinance into an ARM with an IRRRL? Yes. But the new mortgage must have a lower interest rate than your current mortgage.
You can even use an IRRRL to get out of a loan you’ve fallen behind on. The VA does not require you to be up to date on your loan to be eligible for Easy Refinance. However, some lenders do, so if you are in this situation you may need to shop around more to get approved.
And while you can build your late fees and missed payments into the new loan so you can get a fresh start, you may not be approved for a new loan if your finances don’t allow you to pay it. The VA IRRRL program is intended to put borrowers in a better financial position, not in an unsustainable situation.
How a VA Streamline refinance works
To get VA Simplified Refinance, you will need to apply to a lender that offers this type of mortgage. Working with a VA loan specialist can make the process easier as they are VA loan experts, which are different in many ways from conventional loans. The Veterans Administration itself is not a lender.
As with everything refinanceIt is good practice to apply for a home loan from at least three lenders. The interest rate and fees that you will pay on an IRRRL, even if it is a government guaranteed loan, will vary depending on the lender. You will also want to calculate the break-even period to see when you will start to come out because of your better terms on your new loan and after you have paid the closing costs to refinance. It’s a simple calculation:
Closing costs / monthly savings = number of months to break even
Depending on the VA, your break-even period must be less than or equal to 36 months (three years). Your lender is required to show you a written comparison of your old loan, your new loan, and the break-even period.
If you think you might receive Permanent Station Change Orders (PCS) in two years, you’ll want to minimize the amount of money that will flow out of your bank account at close:
- One way to do this is to roll your closing costs in your new loan (i.e. finance your closing costs).
- Another way is to ask the lender to pay your closing costs in exchange for a higher interest rate.
A mortgage with a a higher APR may be a better option. See which choice will save you the most money.
The VA says it’s okay if your IRRRL results in a higher monthly payment due to funded closing costs, a shorter loan term, or a move from an ARM to a fixed rate loan. However, if your monthly payment increases by 20% or more, you will need to demonstrate to the lender that you have enough stable and reliable income to make the highest payment. In other words, you will need to be eligible for the loan.
VA IRRRL Qualifications
Here are the two key qualifications to be eligible for VA Easy Refinance:
- The loan that you want to refinance must be a VA loan.
- The home you want to refinance must be your current or old primary residence.
You’ll also need your Certificate of Eligibility, which your lender can obtain electronically from the VA if you don’t already have it.
The new loan must also meet the interest rate reduction guidelines:
- When you switch from one fixed rate loan to another, the interest rate on the new loan should be at least half a percentage point lower.
- When you switch from a fixed rate loan to an adjustable rate loan, the interest rate on the new loan should be at least two percentage points lower.
You also cannot do an IRRRL unless it is at least 210 days since you closed your current VA loan and have made six consecutive monthly payments. If you skipped payments under a forbearance plan, those months do not count towards your six consecutive monthly payments.
Like a FHA streamline refinancing, the VA does not require a credit check or underwriting approval for an IRRRL. This is good news not only if you want to save time, but also if your credit score or income has declined.
Can You Withdraw Money With VA IRRRL Refinance?
You can not cash in any equity in your home with a VA IRRRL refinance. The VA is so committed to this rule that it forces the lender to round up your loan amount if necessary to avoid giving you more than $ 500 on closing.
The only exception to this rule is that you can receive up to $ 6,000 to reimburse you for energy efficiency upgrades you made within 90 days of closing.
Likewise, if you have a second mortgage, such as a home equity loan or line of credit, you cannot use your new VA loan to pay it off.
To sum up, let’s review the pros and cons of Streamline VA refinancing that we’ve featured in this article.
VA IRRRL Advantages
- Lower your interest rate or get a fixed monthly payment
- Integrate your financing costs, closing costs and up to two discount points into the new loan
- Pay a finance charge of only 0.5% of the loan amount
- Avoid paying for an assessment (usually not necessary)
- Skip the credit check (usually not necessary)
- Avoid taking out a loan (usually not necessary)
- Refinance even if your loan is in arrears (a credit check will be required)
- Refinance even if the house is no longer your primary residence
- Finance up to $ 6,000 in home energy efficiency upgrades
VA IRRRL Disadvantages
- The lender can choose to require an appraisal
- The lender can choose to require a credit check
- The lender can choose to require a loan subscription
- You cannot get a refund
- You can only refinance a VA loan
- You can’t refinance a home equity loan
- You will pay closing costs directly or indirectly