What are the benefits of a VA Interest Rate Reduction Refinance Loan or VA IRRRL? Borrowers interested in refinancing their home loans usually have a goal. Some want to cash in on the equity they have built up in their home over time and for this a VA Cash-Out refinance loan is the way to go.
Others want to get a lower monthly payment and/or a lower interest rate. In these cases, the VA IRRRL is a very good option.
Basics Of The VA Interest Rate Reduction Refinance Loan
To get the most out of a VA IRRRL it helps to know what the loan can and cannot do. Don’t waste time applying for an IRRRL if you want cash back on your refinance loan, or if you want to renovate your home at the same time you refinance it. There are other government-backed mortgages that can help you do that.
The VA IRRRL is a very unique and specific loan product. It is ONLY meant to refinance existing VA mortgages and cannot be used to refinance any other type of home loan.
The VA IRRRL is appealing because, similar to its FHA loan equivalent of the same name, there is no VA-required credit check or appraisal. Your lender is free to require one, but the program is basically intended to let the borrower use the original credit application to apply for the new loan under the VA IRRRL program.
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What The VA IRRRL Is Meant To Do
You can refinance an existing VA mortgage using a VA IRRRL to do any of the following:
- Refinance out of an adjustable rate VA mortgage into a fixed-rate loan
- Refinance into a lower interest rate
- Refinance to get a lower monthly payment
The VA IRRRL will feature closing costs, and while there is no downpayment on this refinance loan borrowers will still need to prepare financially for the closing costs and other expenses related to refinancing a home loan.
VA IRRRL Benefits: A Requirement That The Loan Benefit The Borrower
VA loan rules in the VA Lender’s Handbook state that in “most cases” the VA IRRRL must result in a “tangible benefit” for the borrower. This can come in the form of a lower interest rate, lower monthly payment, or getting out of an adjustable rate mortgage. In cases where the borrower’s choices for the loan result in the loan amount actually increasing rather than going down the lender may be required to do a credit check and the borrower may be required to sign a waiver acknowledging that the loan terms are increasing.
What usually causes a VA loan payment to go HIGHER after a VA IRRRL? Add-ons to the loan such as energy-efficient mortgage packages or including certain closing costs in the loan amount.
VA IRRRL Benefits: The VA Energy Efficient Mortgage
One perk we wrote about above is the VA Energy Efficient Mortgage–this is not a separate home loan but rather an add-on to a VA home loan application that when approved adds extra loan funds for approved energy-saving upgrades or additions to the home.
Borrowers should know these energy-saving options are available on most VA and FHA government-backed mortgages and their use, while strictly regulated, can be helpful for those who need the upgrades.
VA IRRRL Benefits: No Use Of VA Loan Entitlement
We’ve already mentioned the fact that VA Interest Rate Reduction Refinance Loans feature no VA-required credit check. That’s already a big plus as long as your lender doesn’t choose to require one anyway (some do) but there’s another factor to applying for a VA IRRRL instead of a cash-out or even a no-cash-out VA refinance loan.
What is that factor? Unlike your original VA loan transaction, the VA IRRRL does not affect your VA loan entitlement.
When you buy your home with a VA loan, the lender is required to verify that you are eligible to do so and that you have enough existing VA loan entitlement to get the loan. Not all borrowers use up the full amount of entitlement, and decide later to use their remaining VA loan benefit on another home loan.
When you apply to refinance a VA mortgage using a VA IRRRL, the entitlement issue is moot because this specific refinance loan does not use up more of that entitlement.
VA IRRRL Benefits: No Mortgage Insurance Required
Like the original purchase you made with your VA loan benefit, the VA refinance loan program does not feature a requirement for mortgage insurance.
When you buy a home using a conventional loan, you may be required to carry mortgage insurance unless you make a large down payment (20% down is typical in these cases). VA loans, including VA IRRRLs, have no such requirement.
What You Should Know About VA IRRRLs
VA refinance loans may be offered to you as “zero money out of pocket” options where approved closing costs are included in the loan amount.
As with VA Energy Efficient Mortgage options, choosing these options has the potential to raise your monthly mortgage payment higher than you might have intended. It’s crucial to pay attention to how each add-on to your loan amount might affect the overall cost of your home loan.
There is another factor you should consider when deciding on a VA IRRRL. Those who refinance out of adjustable rate mortgages may actually find the final interest rate on their new loan is higher than the old one.
That difference may not be a major one (depending on circumstances) but borrowers who refinance out of an ARM loan when the rates are low (especially if you are still in an introductory or teaser rate time frame) could find the new interest rate higher than they expect.
The trade-off with this higher rate is the fact that the new loan (assuming the borrower chooses a fixed-rate mortgage to refinance into–VA IRRRLs may technically allow you to refinance into a new ARM loan) has a rate that will NOT CHANGE, unlike the conditions of the adjustable rate mortgage, which under the VA loan program is subject to changes at fixed intervals with limitations on how high or low the rates can be adjusted in a single round.
For those who worry about long-term increases to their mortgage payment with an ARM loan, the VA IRRRL is a very good option to research, but don’t expect the new interest rates you get to be as low as the teaser rate you were offered on the original VA Adjustable Rate Mortgage, that rate may not be available when you apply.
A Word About Reduced Loan Terms
Borrowers who choose a VA IRRRL may, depending on the nature of their original loan, decide to go for a shorter loan term with the refinance. If you shorten your loan from a 30-year repayment schedule to a 15-year loan term, anticipate a proportional increase in the monthly payment required. Splitting your mortgage into equal payments over 30 years definitely features lower payments than those for 15-year notes.
If you can afford the shorter and the higher-payment-per-month conditions of a shorter loan term, it’s a great idea to consider as you will save money over the lifetime of a 15 year loan thanks to lower interest payments (in many cases) and a reduced amount of time you’re required to pay that interest.
Talk to a participating VA lender about your options if you aren’t sure how to approach this type of home loan refinancing using your VA mortgage benefits.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News
