Should I Use a Streamline (IRRRL) or Cash-out Refinance?
This is the million-dollar question. Well, it’s usually at least a few-thousand-dollar question. Many borrowers are not sure what refinance option they should choose, and they would rather do their own research and decide what’s best than just take their loan officer’s word for it. We’re going to compare the VA streamline refinance with the cash-out refinance by taking three common scenarios and suggesting which one is likely the best. We’ll talk about when you need cash for something when you’re in a hurry to get the refinance done, and when you are looking for a lower interest rate. These don’t cover every different situation, but you’ll at least get a feel for what strengths each refinance option has.
If You Need a Lot of Cash
You’ll definitely want to go with the cash-out refinance. The streamline only offers one option for getting cash out, and that is by adding on an Energy Efficiency Mortgage (EEM) to the loan, which can get you up to $6,000 for the specific purpose of making your home more energy efficient and lowering your utility bills. Since this is the only way you can get cash proceeds from a streamline it’s usually best to go with a cash-out if you are needing money for a new car, other improvements to your home, to start a business, or go back to school. You can also use a cash-out refinance to consolidate debt and pay off credit cards, but you cannot use a streamline to do so. While this is one of the disadvantages of the streamline, it’s actually just a side-effect of one of the largest advantages of it.
If You’re in a Hurry to get the Refinance Done
You’ll definitely want to go with the streamline option. Cash-out refinances can take up to 90 days to close while a streamline can be closed in as little as 10 days. What makes streamlines so fast? The same thing that prevents borrowers from taking cash out on them: virtually no credit underwriting is required, and neither is an appraisal. The borrower’s payment history on the current loan is used in lieu of a credit check, and an appraisal is skipped in order to help the loan process faster. However, without an appraisal, the home’s current fair market value can’t be established, and without a credit check, the lender can’t know how big of a monthly payment you can afford. For most cases where you’re not looking for cash out for something other than energy-efficient upgrades, the streamline is going to be your best bet.
If You’re Looking for a Lower Interest Rate
Most people refinance in order to take advantage of lower interest rates. However, this is not as cut-and-dry as the first two situations. Usually, you want to go with the streamline since it was made for exactly that purpose, but other factors can change that situation. For example, if you’ve undergone a divorce or a marriage since your last loan and you need to change the names of the people on the loan, you may not be able to use a streamline to do that. Also, if you want a lower interest rate but are also looking to buy a car, then a streamline is probably not your best bet. However, as long as you are just looking for a lower interest rate and that is really your only concern, then the streamline will fit you like a glove. Streamlines are extremely convenient and fast, and they save you money as well as time. Closing costs are more affordable, and the VA allows you to roll every dime of closing costs into the loan on a streamline if desired while a cash-out refinance does not offer this option.
For the most part, you’ll want to do a streamline if you can. Start by looking at the streamline, then move to a cash-out refinance if a streamline is not appropriate for your situation. Streamlines may not be appropriate if you need cash out for something other than energy efficient improvements, if the obligors are changing on the loan, or if you are refinancing from a conventional to a VA loan.