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

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 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 wrap your closing costs and VA funding fee into the new loan product, 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
  • Refinance in order to lower your rate or reduce your monthly payment (in other words, refinancing must result in a “net tangible benefit”)

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.

How much does a VA IRRRL cost?

You may remember hearing of the VA funding fee when you 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. So, if you’re refinancing a loan of $150,000, the funding fee would be $750.

Additionally, you can expect to pay closing costs for the new loan, such as recording fees, title insurance, real estate taxes and other expenses.

It’s important to note that some lenders will help reduce those costs. For example, USAA’s IRRRL program covers the funding fee, appraisal and title, along with removing the origination fee.

When is a VA IRRRL a good idea?

Regardless of the upfront costs, the VA IRRRL can be a great move. Here’s a look at when it can make sense:

  • 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. Right now is a good time to do it, too, with interest rates hovering near record lows.
  • 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.

Pros and cons of a VA streamline refinance

Pros Cons
Limited requirements No ability to take cash out
Ability to bundle your closing costs Only VA loans are eligible
Lower payments and less interest Lenders can set their own guidelines

There are many advantages that come with the IRRRL, and there are also a handful of downsides. Here’s a look at the good news:

  • No appraisal or credit underwriting required – You may 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. The IRRRL aims to expedite (streamline) your loan application without any underwriting, minimum credit score or income or appraisal required.
  • Wrap your closing costs in your loan – The closing costs on an IRRRL tend to be lower anyway, including the discounted funding fee, but you can wrap all your expenses in your new loan amount. This means you can refinance your home without any upfront costs.
  • Secure a lower interest rate – With an IRRRL you can 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.

Here are the potential drawbacks to consider before applying:

  • You can’t take cash out of your home – Unlike the VA cash-out refinance, the IRRRL doesn’t allow you to receive any cash proceeds during the loan process. This is a major downside if you have a lot of home equity and you want to use it to pay down debt, pay for home improvements or reach another financial goal.
  • The IRRRL is only available for existing VA loans – You cannot use the IRRRL to refinance a conventional loan, an FHA loan or any other type of home loan.
  • Lenders can set their own guidelines for approval – While the Department of Veterans Affairs states the IRRRL doesn’t have any underwriting or credit requirements, lenders can add their own. At Veterans United Home Loans, for example, you cannot have any late payments of 30 days or longer within the last 12 months on the loan being refinanced in order to qualify.

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, so you should comb through the fine print to figure out what’s best for your finances.

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 may 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.

Bottom line

With interest rates so low, it’s a good time to consider refinancing, and the VA IRRRL program can make that process relatively painless and low-cost. As you weigh your options, use Bankrate’s VA loan calculator to see how much your new payment might be.

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Written by
David McMillin
Contributing writer
David McMillin writes about 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
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