Closing costs are always a hot topic when thinking of any refinance, including the VA streamline refinance. With this loan, you can refinance with only verifying your mortgage payment history and proving that you benefit from the loan with a lower payment or less risky loan type.
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What do the simplified requirements mean for your closing costs though?
You’ll still pay closing costs on the VA streamline refinance. They will likely be less than you paid when you purchased the home only because there’s less work involved on the lender’s part. Just like the purchase VA loan, though, the VA has strict standards regarding what you can and cannot pay with this loan program.
The Allowed Closing Costs
The VA allows the following closing costs to be paid by veterans:
- Origination fee (up to 1% of the loan amount)
- Discount points (up to 2% of the loan amount)
- Title examination and insurance fees
- Flood certification fees
- Recording and courier fees
- VA funding fee
If a lender charges the allowed 1% origination fee, the lender may not charge any of the following itemized fees:
- Processing fee
- Application fee
- Closing fee
- Notary fee
- Tax service fee
- Marketing fees
The lender has the option to charge the flat 1% origination fee or itemize the above fees, of which the total may not exceed 1% of the loan amount.
Veterans can wrap the allowed closing costs into the loan, along with the funding fee. If you choose to pay more than two discount points to further lower the interest rate, you will have to pay any points higher than the maximum two points in cash at the closing, though.
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VA streamline refinance loans typically don’t require a credit report or appraisal, so you won’t have to worry about paying those fees in most cases.
The VA Funding Fee
All veterans pay a funding fee every time they take out a new VA loan. The only exception to the rule is veterans that were hurt while on active duty or that collect disability because of an injury that occurred while on active duty. These veterans may be eligible for a funding fee waiver.
If you are not eligible for a funding fee waiver, you’ll pay 0.5% of the loan amount for the VA IRRRL. This is quite a bit less than the standard 2.15% that veterans that were in the regular military often pay for the VA purchase or cash-out refinance.
Do you have to set up an escrow account with the VA IRRRL?
No, the VA doesn’t require veterans to set up a new escrow account with the VA IRRRL. If you are disciplined enough to save the money yourself and to pay your taxes/insurance on time, the VA allows you to handle it. If you do set up an escrow, this will increase the amount of cash you must bring to the closing. The exact amount depends on your tax and insurance due dates and how close those dates are to your closing date.
Will you have to pay prepaid interest?
If you close on any day prior to the last day of the month, you will have to pay some prepaid interest. For example, if you close on the 20th and there are 30 days in the month, you will pay 10 days of interest to get you to the end of the month.
Do you have to pay discount points?
You definitely do not have to pay any discount points. If you can find a lender that will give you a rate that is low enough without paying any discount points, you can save the money and enjoy your lower rate.
Does it make sense to take the higher interest rate and pay lower closing costs?
Some lenders do allow borrowers to have lower closing costs in exchange for a slightly higher interest rate. This means you’ll pay more total interest over the life of the loan. This doesn’t make sense in all situations. You should think about how long you plan to live in the home. If this is your forever home, paying higher interest for the next thirty years could come out much more expensive than paying the closing costs on the loan.
Do all lenders charge the same closing costs?
No, you should try to shop around with at least 3 lenders to get a good idea of the average closing costs for your area. Some lenders may charge much more or much less than another. Having a few quotes available to you will help you decide which loan is right for you.
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