The Options to Choose From on an IRRRL
What can you do with an IRRRL? What can’t you do? We’ll answer those questions in this article. You have some choices on the term of the new loan, what to do with closing costs, and even some say in your interest rate. You have some choices of add-ons that you can make, and what type of interest rate you have. If you’re interested in doing so, and have an amenable lender, you might even be able to choose a specialized type of amortization schedule. We’ll cover all of these choices, and make sure you know what your options are. Unfortunately, we won’t be able to go into too much detail, but a VA-approved lender can help answer any of your questions above and beyond what we cover here.
The VA allows borrowers getting an IRRRL to have some flexibility with their new loan term. As long as the term is no longer than either 30 years and 32 days or 10 years longer than the original loan term, you can work out the best term with your lender. For example, if your original loan is a 15-year term, the longest you can get an IRRRL for is 25 years. The term length you choose will affect the entire loan; your monthly payment will be affected, the amount of interest you pay over the life of the loan, and even the interest rate you will be offered.
The IRRRL also allows for a fair amount of choice on your closing costs. You obviously can’t choose to not pay them, but the IRRRL allows for all closing costs to be rolled into the loan amount instead of being due up front. Obviously, the disadvantage to that is that the closing costs will be added to principal and your interest is calculated off your existing principal – so you’ll pay interest on the closing costs if you don’t pay them up front. But in this way, the IRRRL is great for borrowers who don’t have thousands of dollars on hand to pay upfront closing costs and for borrowers who do have enough saved up. But when to pay them is not the only choice you have about closing costs.
You can also choose to pay for discount points to lower your interest rate. The lender sets the price for discount points, and you can decide whether it’s worth paying them or not. Even better, you can also choose to roll up to two discount points into the loan with your closing costs. You can pay for more than two discount points if you wish, but only two can be rolled into the loan amount. Be careful if you decide to do this, though, because the cost of the discount points, plus the interest you’ll pay on them as they are rolled into the loan, may be greater than the savings from the lower interest rate. The VA has done it’s best to give you as many options as possible with their streamline refinance option.
There are some things you can add onto your IRRRL, and some things you cannot. Generally speaking, you can’t get any money out of your IRRRL that isn’t to pay off the old loan you are refinancing, but there are one or two exceptions. You can choose to apply for an EEM (energy efficiency mortgage) along with your IRRRL, which can get you up to $6,000 extra to cover energy efficient upgrades to your home. You’ll need to provide detailed information to your lender about what you intend to spend the money on, and he or she will have to approve it. Energy efficient upgrades can be simple things like insulation, or new windows, or more extreme things like a new furnace or air conditioning system that is more efficient.
You can also make the choice between a fixed-rate mortgage, an adjustable-rate mortgage (ARM), or a hybrid adjustable-rate mortgage. A fixed-rate mortgage is a mortgage in which the interest rate is locked in place during the loan application process and remains the same throughout the entire duration of the loan. An adjustable-rate mortgage is a mortgage in which the interest rate adjusts each year based on what the market is doing. A hybrid ARM is a mortgage in which the interest rate remains fixed for a set number of years (usually 3-5), then begins to adjust annually after that. While an ARM and hybrid ARM may sound riskier, they nearly always result in saved money for the borrower.