Deploying the IRRRL

A calculator, pen and notebook

You already know that you have the best mortgage program in the market today. The VA home loan, for those who qualify, is the most attractive financing option for those who wish to buy and finance a home with no money down. In addition to the no money down feature, your VA loan required less out of pocket from you along with some very competitive rates. But sometimes that loan can be tweaked just a bit when interest rates fall lower than what you currently have.

When mortgage rates fall, they can sometimes do so without your noticing. In fact, it's really the VA loan officer who tracks interest rates on a daily basis and compares the current rates with the interest rates associated with past client loans. Good VA loan officers do that anyway and when it might be a good idea to refinance your current loan into a lower rate, you'll be getting a phone call or email. When you get that call or email, how do you know if the IRRRL is really a good thing?

The Streamline

The IRRRL is the acronym for the Interest Rate Reduction Refinance Loan. Those in the industry however typically refer to it as the VA streamline refinance. Why the streamline moniker? Because refinancing into a VA streamline is so much easier compared to the process when financing a purchase with a VA loan.

When you use a VA loan to buy a property, the lender will evaluate your current income by taking copies of your most recent pay check stubs and your W2 statements. You may also be asked to provide recent income tax returns along with bank and investment statements and demonstrate a responsible credit history. If you recall, the documentation process needed just to get the loan into an approval stage likely took a couple of weeks and you certainly signed and initialed your fair share of loan documents, acknowledgments and disclosures.

Not so the VA streamline. As long as you're refinancing an existing VA loan into another and your rate is lowered or you're refinancing out of an adjustable rate mortgage into a fixed rate loan, you may be eligible. And the process really couldn't be much easier.

The Documentation

What sort of paperwork is required for a streamline refinance? First, you'll need to complete an application but that's really the most tedious of all. A VA streamline reduces the amount of documentation needed and doesn't require any evidence of income whatsoever. No pay stubs, no W2 forms and no tax returns.

You won't need to obtain a new certificate of eligibility for a VA streamline, either. With regard to credit? There is no minimum credit score required and the VA program doesn't require an appraisal on a streamline refinance. Note however that while the VA doesn't require a credit score or an appraisal, an individual lender may. Yet as long as you haven't had more than one mortgage payment 30 days past the due date within the past year your loan can be approved.

Is An IRRRL Worth It?

While the VA streamline is an attractive as well as an efficient way to reduce the interest paid on your loan, you should still make certain it's right for your situation. A lower rate doesn't necessarily mean a VA streamline makes sense.

To determine whether or not it makes sense, speak with your loan officer and find out what your new monthly principal and interest payment will be. Don't pay much attention to how much lower the new rate may be, but how much lower you can get your payment.

Next, compare the closing costs needed in order to complete the transaction. Finally, divide the monthly savings into the closing costs and the result is how many months it will take to "recover" the closing costs with the new, lower rate.

Say you have a 30 year rate on a $200,000 mortgage at 5.50 percent. Your principal and interest payment is $1,135. Now say your loan balance is $195,000 and your closing costs are $3,000 and you can get a 30 year fixed rate today at 4.50 percent. And don't forget the VA funding fee but for a VA streamline refinance, the funding fee is only one-half percent of the loan and in this example your final loan amount might be $200,000. Your new monthly payment would be $1,013, or $122 lower.

If your closing costs, including the funding fee of $990 in this example, add up to $3,990, you would recover your closing costs in 32 months. There are other considerations such as exploring a no closing cost option as well as interest already paid on your existing loan.

If you intend to own the property for as long as it takes to recover your closing costs within a relatively short time frame, say between two to four years, the IRRRL is something to consider. Speak with your loan officer and run the numbers together. Doing so will provide you with the answers you need.

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VA Loan Home Ownership