Are there Closing Costs on a VA Refinance?
Closing costs: every borrower’s favorite part about getting a loan. Because the six figures you have agreed to pay back at 5% annually-compounded interest over the next 30 years isn’t enough, right? It’s obviously more complicated than that, but that’s how it feels when you first find out that of the $20k you painstakingly saved up over the last 5 years for a down payment, only about half of it will actually go towards the down payment. In a conventional loan, there’s always the worry that the ability to charge closing costs is abused, and only diligent shopping around and lots of research of homework can help you be sure when someone is charging more closing costs than they should be. Like any loan program, VA loans have closing costs: refinances as well as new purchase loans. The VA, however, has policies in place to both protect the veteran borrower and ease the burden of closing costs.
Regardless of what type of refinance you get, there will be closing costs. However, costs on an Interest Rate Reduction Refinance Loan (IRRRL) are different from the closing costs on a cash-out refinance. Closing costs on a cash-out refinance are very similar to closing costs on a new purchase loan. Closing costs on a cash-out refinance can include prepaid interest, property taxes, and homeowners insurance, discount points on your interest rate, the VA Funding Fee, any homeowners association dues, as well as the cost of getting your credit report, a pest inspection fee, the VA appraisal, origination, underwriting, and processing fees, and the cost of the title exam and insurance. Sounds like a lot (and it is), but the VA makes sure that the borrower only pays for things that are both typical and acceptable for the borrower to be charged. Nothing prevents the borrowers’ closing costs being paid by the seller, but nothing requires the seller to pay for them either.
The VA has limits to the overall amount that the lender can charge the borrower, and on a cash-out refinance, the VA Funding Fee can be rolled into the loan amount and not be due upfront. Since the Funding Fee can be as much as 3.3% of the loan amount, this is no small boon to the veteran borrower. Other than the VA Funding Fee, no other closing costs can be rolled into the loan amount, at least on a cash-out refinance. While the actual amount of closing costs charged on your VA loan will vary widely depending on the loan amount, the region you live in, and the lender you choose, you should expect to be measuring it in thousands of dollars, not hundreds.
The IRRRL is a different story. Yes, there are still closing costs on an IRRRL, but the simple and quick nature of the IRRRL cuts out of the costs. You won’t have to worry about the fee for the VA appraisal, you can expect the underwriting and origination fees to be significantly lower, and the real kicker: every dime of closing costs on an IRRRL can be rolled into the loan amount. The purpose of the IRRRL is to provide a streamline refinance option to VA borrowers to enable them to take advantage of lower interest rates, and the VA wants as few obstacles as possible to borrower wanting to take advantage of this benefit. The IRRRL allows you to not only roll the Funding Fee into the loan amount, but all of the allowable fees and charges that the lender asks. But wait, there’s more.
On an IRRRL you can also purchase two discount points on your interest rate, and roll that cost into the loan. In other words, you can get a better interest rate without paying a dime right now. You can purchase more discount points if you want, but only two of them can be rolled into the loan amount. One of the biggest advantages of the IRRRL over cash-out refinance is the way closing costs are handled on an IRRRL. You should remember though, that if you decide to roll closing costs into the loan amount, you’ll end up paying more than you would if you had paid them upfront, due to the interest being charged on them.