VA Streamline Refinance Loan Basics
Refinancing your existing VA home loan may be simpler than you thought if you’re applying for a VA Streamline Refinance Loan. Streamline refinancing, also known as a VA Interest Rate Reduction Refinancing Loan or IRRRL, has no VA-required credit check or appraisal. While this type of refinancing does not offer money back to the borrower at closing time, it does require a lower interest rate or lower monthly payment (or both) as a result of the loan in most cases.
How does VA Streamline Refinancing work? Let’s look at the rules for this loan program as described in VA Pamphlet 26-7, in the section titled”What is an IRRRL?” Remembering that Streamline Refinancing and IRRRLs are the same thing, we find:
“An IRRRL is a VA-guaranteed loan made to refinance an existing VA-guaranteed loan, generally at a lower interest rate than the existing VA loan, and with lower principal and interest payments than the existing VA loan. Generally, no appraisal, credit information or underwriting is required on an IRRRL, and any lender may close an IRRRL automatically.
Under the section titled “Interest Rate Decrease Requirement” we find the guidelines for how VA Streamline Loans/IRRRLs must give a tangible benefit to the borrower in the form of lower rates or payments. “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.”
The reason for the ARM loan exception is because if the borrower refinances from an adjustable rate loan to a fixed rate mortgage, the fixed rate may be higher than the interest rate the ARM loan is currently at; however, the refinanced loan may well have a lower interest rate than the ARM might have later down the line, depending on the terms of the original mortgage.
Does the VA ever allow a Streamline Refinance or IRRRL where the borrower’s payments actually go up? It has happened in the past and under the right circumstances, your refinance loan may be approved even if the payments do go up based on your choices for certain loan options. “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.”
The VA does advise borrowers who choose loan options that increase the monthly payments;
“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.”
Consider your choices regarding these options carefully and do the math before you commit. In some cases it may be better to pay the closing costs or discount points up front rather than including them into the loan amount. But much depends on your financial needs and goals for refinancing.
Do you have questions about VA loan refinancing? Ask us in the comments section.