Veterans and service members can refinance their homes through the VA home loan program, the same popular benefit that provides $0-down mortgages. Homeowners who are entitled to this benefit can apply for a VA refinance with favorable terms. There are two main types:
- Interest Rate Reduction Refinance Loan (IRRRL), also called a “streamline” refinance
- VA-backed cash-out refinance loan
Given today’s low-interest-rate environment, homeowners who qualify may be considering refinancing to lower their interest costs or monthly payments. Or, they might be looking to pull out cash from their accumulated home equity to pay for home improvement projects, debt payments or other purposes.
If you’ve served in the military and own a home with an existing VA mortgage, here’s what you need to know about VA refinance loans.
What is an IRRRL?
The IRRRL is specifically meant to make an existing mortgage more affordable by lowering the interest rate to current market rates. For homeowners with VA loans, it’s one of the easiest loan products to apply and qualify for and comes with lenient requirements compared with traditional mortgages.
Borrowers looking to reduce overall interest costs can use an IRRRL to refinance to a 15-year mortgage from a 30-year mortgage. However, the VA warns that you should make sure the new interest rate is at least one percentage point less than the original rate in order to keep the monthly payment affordable. Your payment will be higher if you’re paying your home off more quickly with a shorter-term loan.
What are the benefits of a VA IRRRL refinance?
Refinancing with a VA refinance loan may get you a better interest rate or a lower monthly payment. If you currently have an adjustable-rate mortgage, refinancing through an IRRRL can allow you to lock in a fixed rate and consistent monthly payment.
Compared with a typical refinancing, the IRRRL is indeed streamlined. The IRRRL has:
- No appraisal or appraisal fee
- No credit underwriting, minimum credit score or income requirements
- No out-of-pocket costs if you choose to roll the closing costs into the new loan amount
As with other VA loans, borrowers must go through a mortgage company, private bank or credit union, all of which can set their own terms and fees. The VA doesn’t offer the loan but backs them and allows the lender to recoup all of their losses in the event of a foreclosure. Because there is less risk for the lender, they’re more likely to offer better terms and lower rates.
What are some potential disadvantages of an IRRRL?
An IRRRL isn’t the right financial move for every veteran. Carefully consider your reasons for refinancing. Keep in mind that:
- You can’t cash out your home equity with this type of VA refinancing
- Refinancing an existing adjustable-rate mortgage (ARM) to a fixed-rate loan through an IRRRL could result in a higher interest rate
Who is eligible for an IRRRL?
Applicants typically need to have a current VA loan with no late payments and be able to show stable employment. Other than that, there aren’t many requirements, and homeowners can refinance up to the Fannie Mae and Freddie Mac loan limits in most areas.
The applicant only needs to demonstrate that they previously occupied the home at some point during the initial mortgage. This means that homes purchased with a VA loan then converted into rental properties can qualify.
According to the December 2019 Origination Insight Report by Ellie Mae Inc., the average FICO score for a VA loan refi was 712.
One thing you will need is the Certificate of Eligibility (COE) you used to get your original VA loan. You can apply online or through lenders as most have access to the Web LGY system.
While the IRRRL officially doesn’t require an appraisal of the home, some lenders may insist on it and may consider home values and equity. One final caveat with the home itself is that homes listed for sale do not qualify.
To be eligible for an IRRRL:
- You must have an existing VA loan that you’re refinancing to another VA loan, reusing your entitlement.
- You need the Certificate of Eligibility (COE) from the original VA loan.
- If there is a second mortgage on your home, that lien holder must agree to subordinate so your new VA loan will be a first mortgage.
- You must certify that you occupied the home at one time. (Unlike other VA loans that require current occupancy.)
What are the costs of an IRRRL?
IRRRL users must pay a VA funding fee. This can be paid at closing or folded into the loan. The funding fee for an IRRRL in 2020 is 0.5 percent of the loan amount.
You may be exempt from the VA funding fee if you are in one of these categories:
- Veteran with service-related disabilities
- Spouse of veteran who died in service or from a service-related cause, or was totally disabled
- Active-duty service member awarded a Purple Heart
One thing that’s not allowable with an IRRRL is a cash-out refinance of any kind. For that, you’ll need a VA-backed cash-out refinance loan, which typically has more stringent requirements.
What is a VA-backed cash-out refinance loan?
Your VA loan entitlement lets you refinance an existing mortgage and take out some home equity as cash.
What are the benefits of a VA-backed cash-out refinance?
Whether your existing mortgage is a VA, FHA, or conventional loan, you can get a VA-backed cash-out refinancing. Here are some of the ways you can do this:
- Refinance a non-VA mortgage into a VA loan, often with a lower interest rate or better terms
- Refinance your existing mortgage to tap home equity and get cash out
- Refinance a construction loan to a VA loan
- Refinance up to 100 percent of the home’s appraised value
What are some potential disadvantages of a VA-backed cash-out refi?
Tapping home equity can provide financial flexibility, but it’s important to weigh the risks and long-term consequences. Think carefully before spending your hard-earned equity for consumer debt, home improvement projects or other expenses. Since your home is collateral, there is the risk that if you can’t repay the loan, you could lose your home.
With a VA-backed cash-out refi, here are some of the factors to consider:
- Does require an appraisal
- Does require credit underwriting
- Does have closing costs
- Cash taken out from home equity must be repaid over the term of the new loan
Who is eligible for a VA-backed cash-out refi?
For a cash-out refinancing, you generally must meet the same requirements as for a VA loan:
- Unlike with an IRRRL, you do need to live in the home you are refinancing through the VA-backed loan
- You must qualify for a Certificate of Eligibility (COE). This is based on your record of military service. This includes: Veterans who meet minimum service requirements; active-duty service members who have served the minimum time period; Reserve and National Guard members who meet certain requirements, and eligible surviving spouses
- You’ll need to provide financial documentation to your lender, including: pay stub, W-2 forms for two years, Federal tax returns
What are the costs of a VA-backed cash-out refi?
The VA funding fee for cash-out refinancing is higher than for an IRRRL. The fee has increased slightly in 2020 to 2.30 percent of the loan amount for first-time use of the entitlement, and 3.60 percent for subsequent use.
As with the IRRRL, some borrowers may be exempt from the funding fee. The exemptions include:
- Veterans with service-related disabilities
- Spouses of veterans who died in service or from a related cause, or were totally disabled
- Active-duty service members who were awarded a Purple Heart
In addition, you’ll have to pay closing costs determined by the lender, such as an origination fee, credit report fee, VA appraisal fee, and other fees — which can add up to 1 percent to 3 percent of the loan amount.
Want an IRRRL or a VA-backed cash-out refinance loan? Start by checking current VA refinance rates and comparing them with your current mortgage. Bankrate’s mortgage refinance calculator can help you determine how much you could save and when you may break even.
For more on the advantages of VA loans and how they work, here are some useful resources: