The VA Interest Rate Reduction Refinance Loan (IRRRL) Program Explained

Marcus Marion, CMA™ 1 month ago 0 8

In this article: An overview of the VA Interest Rate Reduction Refinance Loan (IRRRL) program and the benefits it can provide for homeowners.

We’ve written a lot about the VA home loan program in the past, including the many benefits this program offers. One of those benefits has to do with refinancing.

With an Interest Rate Reduction Refinance Loan (IRRRL) backed by the VA, homeowners can reduce their interest rates and lower their monthly payments. This program also allows refinancing homeowners to skip the home appraisal and credit underwriting.

What Is the VA IRRRL Program?

The VA’s IRRRL program offers a streamlined mortgage refinancing option to eligible homeowners. It is specifically designed for military members and veterans who already have a VA home loan for a current or previous residence.

The primary goal is to lower the interest rate and monthly mortgage payments, hence the name: Interest Rate Reduction Refinance Loan.

Mortgage professionals often refer to the IRRRL program as a “streamline” refinance. That’s because it offers a simpler path to refinancing, compared to a regular (non-VA) refinance loan.

Specifically, an Interest Rate Reduction Refinance Loan allows homeowners to refinance with very little paperwork and no home appraisal. Mortgage lenders can also skip the typical credit check that’s required for most home loans.

Benefits of an Interest Rate Reduction Refinance Loan

So the benefits of this program are twofold:

  • It gives homeowners a way to secure a lower interest rate, thereby reducing their monthly payments going forward.
  • It also makes it a lot easier to refinance, when compared to a conventional home loan scenario.

By giving eligible homeowners a way to reduce their rates, it offers the potential for significant savings over the life of the loan. 

Homeowners can also use the Interest Rate Reduction Refinance Loan to switch from an adjustable-rate mortgage (ARM) to a fixed-rate with more stable payments. As you might already know, a fixed mortgage has an interest rate that never changes and therefore offers more predictability over the long run.

How the IRRRL Works

When you refinance your home through the VA’s IRRRL program, you’re essentially replacing your existing home loan with a new one that (ideally) has a lower interest rate.

But the Department of Veterans Affairs only plays a background rule in this process. To apply for an Interest Rate Reduction Refinancing Loan, you’ll need to work with a VA-approved mortgage lender, just like you did when you first purchased the home.

IRRRL refinancing typically comes with closing costs as well. So you want to make sure that the amount of money you save over the long-term surpasses whatever amount you have to pay in closing costs. Otherwise, it might not work to your advantage.

According to the Department of Veterans Affairs, the closing costs associated with an IRRRL transaction typically include the following:

  • Origination Fee
  • Discount Points
  • Prepaid Taxes and Hazard Insurance
  • Title Examination Fee
  • Title Insurance Fee
  • Flood Zone Determination
  • Environmental Endorsements
  • Recording Fees
  • Special Mailing Fees (Fed-Ex, couriers, etc.)
  • VA Funding Fee

About the Funding Fee

While there are some exceptions, most borrowers who use a VA loan have to pay a one-time funding fee. This is true for both purchase and refinancing situations. The Department of Veterans Affairs uses these fees to help finance the program and reduce the burden on taxpayers.

The good news is that the funding fee for Interest Rate Reduction Refinance Loans is typically lower than the fee associated with a standard VA purchased loan. It usually comes out to 0.5% of the new loan amount.

Homeowners can either pay the IRRRL funding fee upfront at the closing, or finance it and pay it off over time. So there is some flexibility here as well.

Who Can Benefit From This Program

The VA Interest Rate Reduction Refinance Loan program can benefit many homeowners. But it’s not right for everyone. For example, a homeowner who plans to move again in a few years probably won’t benefit from refinancing.

On the other hand, a person who plans to stay in the home for many years after refinancing could enjoy long-term savings by reducing their interest rate.

Additionally, homeowners with an adjustable-rate VA loan that’s about to adjust could benefit by refinancing into a fixed-rate mortgage. This can also be accomplished through the IRRRL program.

Minimum Requirements for Borrowers

This program is only available to homeowners who used a VA loan to purchase their homes. When applying for an IRRRL, you must certify that you previously lived in the house.

It bears repeating: The IRRRL can only be used to refinance an existing VA loan. You cannot use this program to refinance a conventional mortgage.

The mortgage lender must verify that your monthly payment will decrease after refinancing, since that’s the whole point of this program. But there are some exceptions to this requirement, particularly when refinancing out of an ARM and into a fixed-rate mortgage.

The Department of Veterans Affairs does not require credit underwriting for IRRRL scenarios. Even so, you’ll probably have to meet the lender’s basic standards.

The occupancy requirements for the Interest Rate Reduction Refinance Loan program are different than the rules for a standard VA purchase loan.

Homeowners who use a VA loan to buy a house must certify that they intend to occupy the home as their primary residence. But as the Department of Veterans Affairs states: “For an IRRRL, you only need to certify that you previously occupied [the home].”

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