If you used a VA loan to obtain your current home, yet wish that you could take advantage of today’s lower mortgage rates, you can. The program known as the Interest Rate Reduction Refinance Loan, or IRRRL, helps to lower the loan for veterans without forcing them to give up their veteran’s benefit. It is simply refinancing from one VA loan to another with very little work or headaches required from you.
Shop Around to Find the Lowest VA Loan Rate
So how do you apply for a lower VA loan rate? The process is simple and starts with you shopping around with various lenders to find the best rate. This is good news for most homeowners as you are not required to use the same lender that you used to obtain the original mortgage if you do not wish to do so. It is generally recommended to shop around at various lenders that provide VA loans to ensure that you are getting the lowest rate possible. In general, you will need to be lowering your interest rate a full percentage point in order to be eligible for the program, although some exceptions do exist on a case-by-case basis.
Little to No Out-of-Pocket Expenses for the IRRRL
Perhaps the best news for current VA loan holders is that there is typically no cash required at closing in order to cover the closing costs of the new VA loan. Most or all of the closing costs that are incurred as a result of refinancing can be rolled right into the new loan. This will affect your monthly payment, but will not require a large up-front amount of cash in order to take advantage of a lower rate. In addition, some lenders are able to provide a slightly higher rate but waive the closing costs of the loan altogether. The advantages of this scenario include the ability to keep your principal loan amount the same as it was when you refinanced while still lowering your payment with a lower rate, even if it is not the lowest rate you might have received.
The Criteria to Apply for a Lower Interest Rate on a VA Loan
As with any streamline refinance program, there are certain requirements that you must meet in order to obtain the new loan with a lower rate.
- All of your loan payments within the last year must have been on time, with the exception of one 30-day late. You must be current at the time of application of the loan.
- The new payment on the streamline refinance loan must be lower than your current payment. The only exception to this rule is if you are refinancing from an adjustable rate mortgage to a fixed rate mortgage, then this rule does not apply.
- The property which you are refinancing must have been owner occupied when you originally obtained the loan but it can be an investment property now.
- The amount of the refinance must be strictly the amount that you currently owe plus any closing costs that are getting rolled into the loan; no cash out is allowed unless you are conducting energy efficient changes in your home, in which case you can receive up to $6,000 in cash at closing.
- The loan that you are refinancing must be a VA loan and the new loan that you are applying for must also be a VA loan.
The Restrictions on the VA IRRRL Program
Aside from the above requirements, there are a few restrictions that you should be aware of before deciding whether or not to lower your VA loan’s rate.
- You are unable to combine a first and second mortgage into one loan under this program. The IRRRL program strictly pertains to your first mortgage on the home.
- You cannot use this loan to make home improvements by taking cash out of the property.
- If your current mortgage is not a VA loan, even if you are a veteran, you cannot take advantage of the IRRRL program.
Understanding the Fees of the New VA Loan
The only fee that the VA requires to fund a VA loan is the VA funding fee. This amount will vary depending on the amount of your loan, but it equals a half of one percent of the loan amount that you are refinancing. This fee can be paid upfront or rolled into the loan. As far as any other closing costs are concerned, the VA does not require any; it is up to the lender that is providing your loan to determine the amount of the fees, if any. If you are unsure about the amount that you are being told, it is beneficial to shop around with other lenders to see how the costs compare.
If you are currently paying a high rate on your VA loan, it pays to see if you qualify for the IRRRL program. The entire process should not take you longer than one month because the VA does not require a new appraisal or credit check. Whether or not these items are completed is up to the individual lender that you choose, as some lenders still wish to know the property value and the status of your credit before extending new credit. If you wish to apply for this new program, it is encouraged that you shop around to find the best rate, lowest closing costs and a minimal amount of paperwork to complete the process and get you on the road to saving money every month.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.