Do you have a VA loan that you want to refinance? You are in luck because the VA IRRRL program can help you with little verification required. The VA only requires lenders to verify your mortgage payment history and to verify that there is a benefit for the refinance. That’s it.
Find out if you are eligible for a VA loan.
There’s a catch, though.
You can’t take any cash out of the home. The IRRRL program is only to help you refinance into a more affordable payment or a better term.
The No Cash-Out Rule
The VA only allows you to include the following items in your Interest Rate Reduction Refinance Loan:
- Outstanding principal balance of your current loan
- Allowed closing costs
- Funding fee
- Prepaid interest
That’s it. You cannot ask for cash back. You also cannot take a small amount of ‘leftover’ cash as you can do with a standard rate/term refinance where you are allowed to take up to $2,000 in cash.
There is one exception to the rule, though.
Energy Efficient Changes
The VA does allow veterans to make up to $6,000 in energy efficient changes to the home. These changes are up to the discretion of the lender’s approval. You must also perform them right before or right after your refinance.
You have to be able to prove that the changes save you money, though. The lender will likely require an Energy Audit on your home by a professional. This way the lender knows that the energy efficiency changes that you make will lower your utility bills. If they don’t affect your bills enough, the lender may not approve the changes.
Compare Offers from Several VA Mortgage Lenders.
A Slightly Higher Payment
Even though the goal of the VA IRRRL is to provide you with a lower payment, you may end up with a higher payment in some cases. As long as your payment doesn’t exceed 20% of its current payment, you have a better chance of approval. A few cases where your payment may increase includes:
- Refinancing from an ARM to a fixed rate – Fixed interest rates are often higher than the ARM introductory rates, resulting in a higher payment
- Lowering your term – If you refinance into a shorter term, your payment will increase to accommodate the faster amortization.
- Making energy efficient changes – Adding $6,000 to your loan may increase your mortgage payment. This depends on how much outstanding principal you have, though. If you paid enough of the mortgage down, this may not have a tremendous effect on your payment.
The Net Tangible Benefit
The most important thing to focus on when using the VA IRRRL is the net tangible benefit. Do you really benefit from the refinance? Is the payment low enough that it’s worth paying closing costs and 0.5% of your loan amount in the funding fee?
Figure out how long it will take you to enjoy the savings by figuring out how long it will take to pay off your closing costs. Take your closing costs and divide it by the monthly savings the refinance will provide you. This is your break-even point or how many months it will take to pay off the closing costs. After that point, you can enjoy the savings. But, is that point too far in the future? Give it careful thought before proceeding.
The VA doesn’t allow cash out on the VA IRRRL in order to protect you. They want you to be able to gain equity in the home and even get a lower payment to afford your payment better. Allowing cash out just keeps putting you behind the eight ball and that’s not what the VA stands for – they protect your financial interests rather than make them worse.
Click to See the Latest VA Refinance Rates.