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Refinancing your VA loan with an Interest Rate Reduction Refinance Loan (IRRRL) 

Military man wearing fatigues standing outside of his home
Photo courtesy of Veterans United Home Loans
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If you qualified for a VA loan, you earned some powerful benefits as a homebuyer: no need to make a down payment and no need to pay extra for mortgage insurance. Now that you have your loan, you might be able to take advantage of another perk: a VA streamline refinance, known as an Interest Rate Reduction Refinance Loan, or IRRRL.

What is a VA Interest Rate Reduction Refinance Loan (IRRRL)?

A VA Interest Rate Reduction Refinance Loan (IRRRL) refinances an existing VA loan, but without many of the requirements that apply in a typical refinance. This type of refinance can be a pathway to lower your monthly payments and lock in a low fixed interest rate, all without having to have an appraisal or undergo a credit check.

How does a VA IRRRL work?

A VA IRRRL is also known as a VA streamline refinance, which is a nod to the fact that the process for this loan is much easier than you might encounter with other refinancing options. That’s because an IRRRL doesn’t require an appraisal or a credit underwriting package, meaning you can likely still get approved even if your credit score or financial situation has worsened since you initially took out your VA loan.

This type of refinance also lets you finance your closing costs and VA funding fee with the new loan, which can help you refinance without paying anything out of pocket upfront. Keep in mind, though, that if you do wrap those costs into the loan, you will still pay for them — just over an extended period of time as they accrue additional interest charges.

Who is eligible for a VA IRRRL?

You’ll need to meet these basic requirements to be eligible for a VA IRRRL refinance:

  • Have a VA home loan
  • Currently live in the home associated with that loan, or have lived in it previously

In addition, if you have a second mortgage on your home, you’ll need to get your mortgage lender to agree to position your newly-refinanced VA loan as the first mortgage.

Pros and cons of a VA streamline refinance

Pros

  • The VA doesn’t ask for much to prove you can qualify for an IRRRL. There are no requirements for an appraisal or any credit underwriting so you might be able to get approved for an IRRRL regardless of whether your income has gone down, your credit score has dropped or your home’s value has tanked.
  • You can finance your closing costs into the loan. The closing costs on an IRRRL tend to be lower anyway, including the discounted funding fee, and you can wrap all your expenses in your new loan amount. This means you can refinance your home without any upfront costs.
  • You could pay less each month and save on interest in the long run. With an IRRRL, you might qualify for a lower interest rate if one is available. This can mean paying a lower amount of interest over the life of your loan, a lower monthly payment or both.

Cons

  • You won’t be able to take any cash out with the refinance. Unlike a VA cash-out refinance, the IRRRL doesn’t allow you to receive any cash proceeds during the loan process. This can be a major downside, particularly considering that there’s been a steep increase in equity for many as home values have risen. With an IRRRL, you won’t be able to tap into this equity to pay down debt, pay for home improvements or reach another financial goal.
  • You’ll still have to pay a small funding fee. The VA IRRRL has a 0.5 percent funding fee. If you’re refinancing a $200,000 loan, for example, the fee will be $1,000.
  • Your lender can still require documentation. While the U.S. Department of Veterans Affairs doesn’t have any specific credit underwriting requirements, it’s ultimately up to lenders to determine whether they want to ask for additional documentation. Be sure to compare lenders to see what qualification requirements they have for IRRRLs.

How to get a VA IRRRL

To get an IRRRL, you won’t go through the VA. Instead, you’ll need to compare options at banks, credit unions and other VA lenders. VA refinance rates can vary between lenders.

Once you’ve settled on a lender, you’ll need to prove that you are eligible for the VA’s home loan program like you did for your original mortgage. You might need to track down your Certificate of Eligibility (COE) through the VA to do this.

Then, you’ll sort through the closing details and determine if you’ll pay those closing costs or include them in the final loan amount.

How much does a VA IRRRL cost?

You might remember the VA funding fee when you first applied for your mortgage. There is also a funding fee for an IRRRL, but the cost is only 0.5 percent of the loan amount. Additionally, you can expect to pay closing costs for the new loan, such as recording fees, title insurance, real estate taxes and other expenses.

Some lenders will help reduce those costs. For example, USAA’s IRRRL program covers the funding fee, appraisal and title, along with the origination fee.

Is a VA streamline refinance right for me?

Here are some scenarios where a VA streamline refinance can be a smart move:

  • When you want to lower your monthly payments – If you find IRRRL offers with a lower interest rate than one you currently have, you can reduce your monthly bill and interest paid.
  • If you currently have an adjustable-rate mortgage – If your existing VA loan has a variable rate, your monthly bill can increase when that rate rises. An IRRRL can help you lock in a fixed rate. Rates have been on the rise so far in 2022, so you might want to consider acting fast before they increase more.
  • If you’re thinking about keeping your property as a form of income – Getting an IRRRL only requires that you used to live in the home — you can move out and rent out the place and still refinance the loan. A lower interest rate can go a long way toward making the property profitable.

Alternatives to VA streamline refinance

An IRRRL isn’t your only option for refinancing your mortgage. These alternatives might be worth considering, too, depending on what you’re looking to achieve:

  • VA cash-out refinance: If you want to tap your home’s equity to borrow additional money, the VA also backs cash-out refinances. While these funds can help cover major expenses, this type of refinance also carries a significantly higher funding fee: 2.3 percent of the loan if it’s your first time, or 3.6 percent if you’ve already done a cash-out refinance.
  • Conventional refinance: You could instead refinance your VA loan into a conventional mortgage. The upside: You won’t have to pay a funding fee with this option. The downside: Rates for conventional mortgages tend to be higher than VA loan rates.

Bottom line

If you’re looking to free up room in your monthly budget, shrinking your housing costs can help. For VA loan borrowers, the VA IRRRL program is one of the best options to consider. Without paying much, you could wind up saving quite a bit of money, depending on your current rate and the new rate and terms you can lock in. As you weigh your options, use Bankrate’s VA loan calculator to estimate your new payment.

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Written by
David McMillin
Contributing writer
David McMillin is a contributing writer for Bankrate and covers topics like credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less.
Edited by
Mortgage editor