The VA has a streamline refinancing option available to VA-eligible borrowers. The VA’s streamline refinance option is called the Interest Rate Reduction Refinance Loan, or IRRRL for short. Refinancing a mortgage essentially means getting another mortgage that pays off the existing one and starts anew, usually with a lower interest rate. Refinances can also result in less principal to pay off if the buyer puts cash in, or a lump sum for the buyer to have as extra money for another purchase if the buyer wants to take cash out. A streamline refinance is different from a regular refinance option in that the loan application information from the original loan is largely re-used, making the underwriting process and the amount of fees involved with the refinance much smaller.
Refinances, especially streamline refinances, vary in process and requirements for each type of loan and even from lender to lender. For a VA loan, regardless of what kind of loan you have (ARM, Hybrid ARM, fixed-rate, etc.) the streamline refinance option available to you is the IRRRL. The day you apply for a new mortgage on a new home you’d like to buy, you’re most likely not thinking much about the time when you’ll be refinancing that loan, unless you’re quite the forward thinker. After life happens and tough economic times hit, a streamline refinance option may be the thing that helps you make ends meet, or just make life for your family a little more comfortable. Refinances, especially a VA streamline refinance, can get you a lower interest rate and lower monthly payments, easing the burdens on your bank account.
The VA takes care of those paying off VA-guaranteed loans. It is actually required for a streamline refinance to provide a certain level of “net tangible benefit” to the borrower. Which means that if you use an IRRRL on a VA loan, you must have either a lower monthly payment or some other form of net tangible benefit that you receive as a result of getting the IRRRL. This is just another way that the VA helps look out for its veterans. But just how large can this net tangible benefit be? How much can the IRRRL be used for?
Back to the new first-time home buyer who is just applying for their VA loan for their home. This person is wondering what the maximum amount he can get for his loan is. Generally speaking, VA loans are limited to what the appraiser deems to be the reasonable value of the property, as well a relatively small amount for energy efficient upgrades to the home and the VA funding fee. Per the VA lender’s guide: “the amount of the loan to the reasonable value of the property shown on the Notice Of Value plus the cost of energy efficiency improvements up to $6,000 plus the VA funding fee”.
Knowing that, we can establish a pretty reasonable expectation for how much an IRRRL might be approved for. An IRRRL is very similar to a regular loan, with some differences. Instead of the reasonable value of the home as the base amount, an IRRRL uses the amount that the borrower still owes on their current VA loan. In addition, another $6000 of energy efficient upgrades can be added onto the amount, as well as certain allowable fees and charges, two discount points, and the VA funding fee. Those additional items will bring your monthly payment up even as a better interest rate brings it down, so it may be a toss-up whether you decide it’s worth it. It comes down to the purpose of refinancing in the first place.
Remember that if your monthly payment increases by more than 20% as a result of the IRRRL, the VA requires that a new credit check be completed using current information. That’s an extra step and hassle, and it may significantly affect the interest rate you get offered. It’s important to evaluate how many ‘extras’ you can handle and still have mortgage terms that will serve you and your family best in the long run. As always, if you have more questions, seek the advice of a VA-approved lender.