VA Loan Refinancing Options – VA Lender’s Handbook Chapter 6
This article is a summary of Chapter 6 of the VA Lender’s Handbook. We’ll try to hit on the important things that the chapter covers here, but Chapter 6 is a particularly valuable piece of the Handbook and has a lot of really good information on refinancing in the VA loan program. Anyone looking to refinance a VA loan really should read the entire chapter, which you can find here. You can also check out our articles on Chapter 6 of the Handbook if you are looking for a simpler explanation of what the Handbook is talking about. Chapter 6 of the Handbook is all about the different refinancing options that the VA loan program has within it: the Interest Rate Reduction Refinance Loan and the Cash-out refinance.
The Interest Rate Reduction Refinance Loan
This refinancing option, also known as the IRRRL, is definitely the option to choose if you can. In order to use it, however, you need to already have a VA loan and be refinancing into another VA loan, and you cannot use this option to get cash out on your refinance. The IRRRL is a great option because it’s streamlined, meaning that “Generally, no appraisal, credit information or underwriting is required on an IRRRL, and any lender may close an IRRRL automatically.” IRRRLs also have a requirement that the interest rate decrease, with only a few exceptions. In addition to that, the monthly payment must decrease unless the loan term is shorter or an EEM is included on the loan. An EEM is an Energy Efficiency Mortgage, which you can add on to your IRRRL to pay for improvements to your home that will lower your utility bills. Before you get too crazy adding stuff to your IRRRL, you should know that if you add an EEM, finance your closing costs as part of the loan, and shorten your loan term, your monthly payment will probably rise significantly, and if it rises more than 20%, you will need to undergo some form of underwriting to make sure that you can afford the increased monthly payment. While even in this case an IRRRL is a better option than a cash-out refinance, it does make the IRRRL a bit less of a benefit.
Other benefits of the IRRRL include the ability to roll all of your closing costs into the loan, a significantly reduced VA Funding Fee, and the ability to complete the refinance very quickly.
The Cash-Out Refinance
Cash-Out refinance is somewhat of a blanket term that covers any type of normal refinance (not a streamline). In other words, you may actually be putting cash into the mortgage, but it would still be called a cash-out refinance. A VA cash-out refinance is going to be the option you’ll want if you are refinancing from a conventional or FHA to a VA loan, or if you are wanting to take advantage of the equity you have in your home for another purpose. If neither of those two situations applies, then you’ll be better off with an IRRRL. A significant difference between the cash-out refinance and the IRRRL is that if you use the cash-out refinance you must certify that you intend to personally occupy the residence as your home after the refinance, while on the IRRRL you simply need to certify that you occupied the residence at some time in the past. This difference in occupancy requirements allows those who needed to move for one reason or another (like PCS orders), to keep their current home and still use VA loan benefits to purchase another home in their new assignment.
Comparing the Two
We’ve already talked a little bit about how the two compare and use cases for each one, but overall if you don’t need cash out and you already have a VA loan, you should at least try to get an IRRRL before going for a cash-out. IRRRLs can sometimes be difficult to get if interest rates have risen and you are not able to find a lender that will give you a lower interest rate than the one you currently have, and in those cases, a cash-out refinance will be a better option for you. All in all, it depends completely on your situation because one option is suited to certain circumstances and the other option is suited to other circumstances.