As you may have heard, the Fed just issued its first rate cut since 2020, reducing the Federal Funds rate by 0.5%. In a previous article, we discussed how this might affect mortgage rates. Initially, most analysts expected a 0.25% cut, which most believe was already factored into current mortgage rates. However, with the additional 0.25%, we could see mortgage rates continue to drop. Currently, mortgage rates are at their lowest since February 2023, and with more rate cuts anticipated—possibly as soon as November—they may fall further.
With all the talk about refinancing, now is a great time to explore VA loan refinancing options. If your current mortgage rate is in the high 6% to 7% range, this could be the perfect opportunity to consider a VA IRRRL (Interest Rate Reduction Refinance Loan).
The VA Interest Rate Reduction Refinance Loan (IRRRL), often referred to as a "streamline refinance," is a popular option for veterans looking to lower their mortgage interest rates. This program, backed by the U.S. Department of Veterans Affairs, offers a range of benefits that can make refinancing more accessible and cost-effective for those who qualify.
Let's dive into what the VA IRRRL is, its key benefits, and the requirements you need to meet to take advantage of it.
What is a VA IRRRL?
The VA IRRRL is a refinance program available to veterans, active-duty service members, and certain military spouses who currently have a VA loan. This loan is designed to help you refinance your existing VA mortgage to a lower interest rate, thereby reducing your monthly payments. It is used to refinance an existing VA guaranteed loan to reduce the interest rate or to refinance and adjustable rate mortgage (ARM) to a fixed rate. The streamlined process of the IRRRL makes it quicker and easier compared to traditional refinancing methods.
Key Benefits of a VA IRRRL
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Lower Interest Rates: The primary benefit of a VA IRRRL is the potential to secure a lower interest rate on your mortgage. This can lead to significant savings over the life of your loan, reducing the amount you pay in interest each month.
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No Appraisal Required: Unlike many other refinancing options, the VA IRRRL does not typically require an appraisal. This can save you both time and money, especially if the value of your home has decreased since you originally purchased it.
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No Income Verification: The VA IRRRL typically does not require income verification, making the process simpler for those whose financial situation may have changed since taking out their original loan.
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No Out-of-Pocket Costs: Many IRRRLs allow you to roll closing costs into the loan, meaning you won’t need to pay anything out-of-pocket at the time of refinancing. Alternatively, you may be able to negotiate with the lender to have them cover these costs in exchange for a slightly higher interest rate.
Closing costs for a VA IRRRL include the VA funding fee which is 0.5% of the loan balance. You will also have an origination fee which can be either a flat fee or percentage. This fee is for the application, processing, document preparation, and more. If you have disability you may be exempt from this funding fee. You also may have other fees such as recording fees, prepaid taxes for example.
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No Reappraisal of Credit: Your credit score won't be a determining factor for this refinance option, which can be beneficial if your credit score has dropped since you obtained your original VA loan.
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Convert from Adjustable to Fixed Rate: If you have an adjustable-rate mortgage (ARM), the IRRRL allows you to switch to a fixed-rate mortgage, providing stability in your monthly payments and protecting you from potential rate increases in the future.
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Fast and Easy Process: The VA IRRRL is known for its streamlined process. With less documentation required and fewer hoops to jump through, it can be completed quickly, allowing you to start saving sooner.
Requirements for a VA IRRRL
While the VA IRRRL offers many advantages, there are still specific requirements that must be met to qualify:
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Existing VA Loan: You must already have a VA loan on the property you wish to refinance. The IRRRL is not available for non-VA loans.
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Previous Use of VA Loan Entitlement: You must have previously used your VA loan entitlement to purchase the home you want to refinance.
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Good Payment History: Lenders typically require that you have a good payment history on your existing VA loan. Generally, you should not have had any late payments within the last 12 months.
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Lower Interest Rate: The IRRRL must result in a lower interest rate unless you are refinancing an adjustable-rate mortgage to a fixed-rate mortgage. In that case, the interest rate might increase slightly, but the stability of fixed payments can be a significant advantage.
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Occupancy Requirements: While you do not have to currently live in the home, you must certify that you previously occupied it.
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No Cash-Out Option: The VA IRRRL does not allow for cash-out refinancing. If you’re looking to take equity out of your home, you’ll need to explore other VA loan options.
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Funding Fee: A VA funding fee is required, which can either be paid upfront or rolled into the loan amount. However, veterans with service-related disabilities may be exempt from this fee. The VA funding fee on a IRRRL is 0.5%.
- 210 Day Rule: There's no limit to the number of times you can use the VA IRRRL program, as long as you wait the required 210 days from the first payment due date of the original loan and make at least 6 payments. Further, each refinance and each one has a "net tangible benefit" of lowering your interest rate and monthly payment significantly.
The VA IRRRL is a powerful tool for veterans looking to lower their mortgage payments and secure a more stable financial future. With its streamlined process, lack of stringent requirements, and potential for significant savings, it’s an option worth considering if you qualify.
As with any financial decision, it’s important to consult with a trusted mortgage professional to understand how a VA IRRRL might fit into your overall financial strategy.
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