VA loan refinance options can help eligible borrowers reduce their mortgage rates, lower monthly payments and / or cash out home equity. The US Veterans Affairs Department (VA) offers two refinance options, including a cash-out refinance and an interest rate reduction refinance loan (IRRRL). VA refinance loans offer several benefits to homeowners.
- VA loans are made by private mortgage lenders and backed by the government. This allows lenders to offer favorable terms.
- VA interest rate reduction loans (IRRRL) offer homeowners with existing VA mortgages a simple way to refinance.
- No private mortgage insurance (PMI) is required with VA loans.
- VA loan refinance options have no pre-payment penalties and may be assumed if buyers qualify under VA lending guidelines.>
IRRRL: Easiest Refinance Ever
The VA's interest rate reduction refinance loan (IRRRL) offers homeowners with VA home loans a simple way to refinance to lower rates and mortgage payments. Also known as a VA streamline refinance, it allows homeowners with VA mortgages to refinance to a new VA mortgage. While borrowers cannot take cash out with an IRRRL, the VA highlights borrower benefits:
- IRRRL uses the homeowner's existing VA loan entitlement. There is no need to re-establish VA eligibility.
- The VA requires no credit underwriting or home appraisal (however, the lender might).
- IRRRL borrowers can roll loan costs into their refinance, pay them in cash or choose a higher rate and let the lender pay these costs for them.
There are a few things that prospective IRRRL borrowers should know:
- The IRRRL funding fee is .5 percent. It may be waived for disabled veterans, or it may be added to the loan balance if the borrower wishes.
- No lender is required to provide refinancing under the IRRRL program, but eligible homeowners can apply for IRRRL loans with any VA-approved mortgage lender.
- The new loan must improve the borrower's financial position (this is called a "tangible benefit"). Lowering the interest rate or replacing an adjustable rate with a fixed rate are two kinds of tangible benefit.
- Borrowers do not have to occupy the refinanced property. IRRRL guidelines only require that homeowners certify that they previously occupied the residence.
- No cash out can be taken, and second mortgages cannot be wrapped into the new loan. However, borrowers can choose to add the refinancing costs to the new loan balance. Homeowners with second mortgages or home equity lines of credit may qualify for an IRRRL, but junior lienholders must agree to subordinate their loans to the new VA first mortgage.
VA Loan Refinance
The VA allows borrowers with non-VA loans to refinance with a VA mortgage. They must provide their Certificate of Eligibility in order to apply, and they must pay (or wrap into the new loan) a VA funding fee. The VA advises consumers that they do not set interest rates, and that it's the homeowner's responsibility to shop and compare interest rates from VA lenders.
Cash Out Refinance
The VA's cash-out refinance enables eligible homeowners to refinance with a larger loan than needed to pay off their old mortgage and take the difference in cash. This is not a streamline refinance, and eligible homeowners can refinance a non-VA loan to a VA cash-out mortgage if they qualify. With a VA cash-out refinance, borrowers may refinance up to 100 percent of their home's appraised value. That's a BIG deal -- most other refinance programs allow cash-out refinancing to just 85 percent or less.
The Federal Trade Commission (FTC) points out that cash-out refinancing reduces home equity and increases mortgage debt. Homeowners considering cash-out refinancing are encouraged to evaluate financial needs with a professional financial advisor before borrowing.
Homeowners ready to refinance are encouraged to compare mortgage quotes and find their best VA loan terms.