VA Loan Rules: Interest Rate Reduction Refinancing Loans
There is a refinancing option for VA borrowers who already have VA mortgages and want to get into a lower monthly payment or interest rate. The VA Interest Rate Reduction Refinancing Loan or IRRRL is designed to help borrowers refinance existing VA loans. These loans can be fixed-rate, adjustable rate, or hybrid adjustable rate mortgage.
The general rule for VA IRRRLs is that the rates on the loan must go down, but exceptions are made in the case of adjustable rate mortgages. Here’s the rule quoted verbatim from VA Pamphlet 26-7, which states, “An IRRRL (which can be a fixed rate, hybrid Adjustable Rate Mortgage (ARM) or traditional ARM) must bear a lower interest rate than the loan it is refinancing unless the loan it is refinancing is an ARM.”
Additionally, the VA requires that in most cases the borrower’s mortgage payments go down as a result of the IRRRL. As with the interest rate reduction guidelines, exceptions do apply in certain cases. Let’s look at what VA Pamphlet 26-7 says about this: “The principal and interest payment on an IRRRL must be less than the principal and interest payment on the loan being refinanced unless one of the following exceptions applies:
- The IRRRL is refinancing an ARM,
- Term of the IRRRL is shorter than the term of the loan being refinanced, or
- Energy efficiency improvements are included in the IRRRL.”
In these three cases, the VA refinancing loan could, depending on the specifics of the loan agreement, actually cause the monthly payments to increase. This can definitely be a factor when energy efficient improvements are rolled into the loan amount. The VA advises:
“A significant increase in the veteran’s monthly payment may occur with any of these three exceptions, especially if combined with one or more of the following:
- Financing of closing costs,
- Financing of up to two discount points,
- Financing of the funding fee, and/or
- Higher interest rate when an ARM is being refinanced.”
The VA may not deny a loan in such cases, but the lender may require new credit checks and other underwriting if the amount of the loan changes. This is permitted (and sometimes required) depending on the individual loan circumstances. If you aren’t sure what might cause your refinance loan to result in higher payments or interest rate, discuss your options with a loan officer and make a decision based on your research on those options.
Do you have questions about VA home loans? Ask us in the comments section.