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What is an Interest Rate Reduction Refinance Loan?

by | May 2, 2018

An Interest Rate Reduction Refinance Loan (IRRRL) is more commonly known as a VA Streamline Refinance or a “VA to VA.” Since VA Loans are only offered to veterans and active duty military members, it would make sense to have a refinancing option available for them as well.

VA Loans

A VA Loan is a type of mortgage that is exclusively offered to veterans and active members of the military.  A VA Loan can only be obtained through approved lenders and is backed by the United States Department of Veteran Affairs, more commonly known as “The VA.” VA Loans were created by The VA in 1944 so that soldiers that were returning home from deployment were able to purchase a home without needing a down payment or excellent credit. After all, their continuous sacrifice to defend our freedom is enough. Over 20 million veterans and active duty service members have been able to take advantage of this amazing benefit and provide for their families.

Benefits of a VA Loan

No Down Payment

A VA Loan offers a variety of benefits that most people dream of having. For starters, a VA Loan doesn’t require a down payment. That’s right, you read that correctly. If you meet the eligibility requirements for a VA Loan, you don’t have to put any money down to use as a down payment. Most loans will require the home buyer to put down 20%. If they are unable to put down 20% of the home’s selling price, they can opt to take out a FHA Loan (Federal Housing Administration), which requires a minimum of 3.5% as a down payment.

Side Note: Although VA Loans do not require a down payment, the borrower is still required to pay the closing costs on the loan. Closing costs for VA Loans depend on the amount of the loan. If the loan amount is for a rather large amount, the closing costs are on average 1%-3% of the loan amount. If the loan is for a lesser amount, the closing costs for will typically by around 3%-5% of the loan amount.

The borrower is also required to pay a VA funding fee. The VA funding fee is usually a one-time upfront cost that the borrowers pay to The Department of Veteran Affairs. The VA uses this to help pay for the VA Loans that default. The funding fee ranges from 1.25% to 3.3%, but is based on certain factors such as your service, how much you’ll be putting down, and if you’ve previously had a VA Loan.

No Private Mortgage Insurance

With a FHA Loan, borrowers are required to purchase private mortgage insurance (PMI) because they are putting down less than the traditional 20% down payment. The lender sees this as a potential risk and so PMI is required. The borrower has 2 options: they can either opt to pay PMI in addition to their mortgage payment, or they can choose to have a higher interest rate and have the PMI absorbed into their mortgage payment. With a VA Loan, mortgage insurance is not required even if the veteran puts down 0%.

Competitive Interest Rates

With such amazing benefits offered, there is usually a compromise. For example, with a FHA Loan borrowers are not required to put down 20% and can even put down as little as 3.5%, but the borrowers is required to pay for additional mortgage insurance on top of their monthly mortgage payment, which can cost as much as the mortgage payment itself.  Because VA Loans are supported and backed by the federal government, these approved lenders are required to take on the “risk.” It is because of this that lenders who are approved to give VA Loans are also able to give competitive interest rates. With competitive interest rates, no required down payment, and no PMI, those who are eligible to receive these benefits would be crazy to not take advantage.

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What is an Interest Rate Reduction Refinance Loan?

Since VA Loans offer a multitude of benefits that set the borrower up for success, it makes sense that if the borrower were to ever refinance, they would have additional benefits when getting a new mortgage as well. With traditional mortgages, refinances can reap amazing rewards, but they can be a headache. Similar to homeowners with traditional mortgages, people with VA Loans may want to refinance into a lower rate so that they can pay less in interest and keep more of their hard earned money in the bank. With an IRRRL, more commonly known as a VA Streamline Refinance, the lending approval process is simplified and easy which helps borrowers to take advantage of their new low rate quickly.

Benefits of an IRRRL

Less Paperwork

An IRRRL or VA Streamline Refinance can only be used to refinance an already existing VA Loan. With refinancing traditional mortgages, there is a lot of paperwork.  Some lenders can make the paperwork aspect of refinancing mortgages much easier through their own internal process and technology. They can simplify the refinancing process to the best of their ability, but there will still be some mandatory requirements that no one will be able to avoid.

With a VA Streamline Refinance, the amount of paperwork is greatly reduced, which is great news for both the borrower and the lender. A VA Streamline Refinance does not require the borrower to get a new home appraisal, a new credit report, or a new Certificate of Eligibility (COE). With less obstacles, lenders can help homeowners refinance to a lower rate quickly so that they can start reaping the benefits almost immediately.

Less Eligibility Requirements

Similar to a VA Loan, the VA Streamline Refinance program has less eligibility requirements which allows more veterans to take advantage of their benefits. The VA Streamline Refinance program does not require a credit report, so regardless of whether or not the borrower has good credit, they are still able to benefit from the lower VA mortgage rate.

With a VA Streamline Refinance, the borrower is also able to refinance a home even if they are no longer living there. That means a VA Streamline Refinance can be used to refinance a house that is being rented out. While the borrower does not have to live there, they will have to prove that they have previously live there.

Encourages Energy Efficiency

While there is a Cash Out Refinance available to homeowners who have enough equity with traditional mortgages, the VA Streamline Refinance program does not allow the borrower to get a cash-out VA Streamline Refinance. There is, however, an exception to this. The borrower is allowed to take out up to $6,000 in cash from your IRRRL in order to pay for energy-efficient home improvements.

Home improvements that make the home more energy efficient increases the value of the home, so it helps the borrower in the long run. Since the only exception to take out cash has a very specific function, the lender may require an audit of the home to prove that the home improvements are energy efficient and will also provide a return on investment.

What is the main purpose of an IRRRL?

The main purpose for a VA Streamline Refinance is to reduce the interest rate. While the main purpose of the VA Streamline Refinance or IRRRL is to get the borrower a lower rate, there are some exceptions. If the borrower opted to take out a VA ARM (Adjustable Rate Mortgage) and wants to refinance into a fixed rate before the interest adjusts, they will most likely have a higher interest rate. Because an ARM has an interest that usually adjusts every year, taking the slightly higher fixed interest rate can be beneficial.

VA Streamline Refinances can also be used to reduce the term of your loan. If the borrower opted to take out a VA 30 year fixed rate mortgage and wants to pay off the rest of the loan as quickly as possible, they would be able to refinance into a VA 15 year mortgage. By shortening the time left on the loan, the borrower would most likely get a lower interest rate. While shortening the term does usually result in a lower interest rate which usually means less money going to interest, the monthly payment may increase.  This is a wise choice if you know that you’re retirement date is in the distant future and you want to pay off your home as quickly as possible so that you won’t have any mortgage payments when you retire.

Overall Thoughts

VA Loans and VA Streamline Refinances offer a lot of benefits to veterans and active duty service members. These benefits are not available for anyone else, so if this is something that you are eligible to receive and have yet to take advantage of, I highly recommend that you do so. With a VA Streamline Refinance, refinancing to make your housing situation benefit you even more has never been easier. With less paperwork and less restrictions and less time involved, the borrower is set up for success.

 

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