The VA Streamline Refinance enables you to refinance your existing VA loan into a loan with a lower interest rate or into a less risky program, such as an ARM to a fixed rate. The best thing about this program is the ability to refinance with very little documentation. The VA started the Interest Rate Reduction Refinance Loan in order to help veterans have even more residual income at the end of every month. As long as you can prove that you pay your current VA loan on time, the VA and the lender need very little to verify that you qualify for the loan. You do not need to verify income, assets, debts or even the value of your home in most cases. However, there is one catch; there is a max loan amount that you must stick to in order to qualify.
How do you Determine the Max Loan Amount?
The max loan amount for VA Streamline loans is not as stringent as one might think. You can refinance more than just the outstanding principal balance on your existing loan. If you need to increase your VA loan for any of the following reasons, it is allowed on the IRRRL program:
- The VA allows specific closing costs to be added to the loan amount as long as they have a direct impact on your loan. A few examples include credit report fees (if necessary), title fees, appraisal fees (if the lender requires it) and recording fees.
- Any discount points you pay on the loan to get your interest rate down as low as possible, with a maximum of 2 points allowed.
- The new funding fee for the new VA loan.
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These fees will increase your loan amount, making it slightly higher than your original loan amount, but because they deal directly with the loan, the VA allows it.
One other area the VA allows an increased loan amount is for borrowers that wish to make energy efficient changes to their home. The lender has the final say in whether or not you can include these changes and the maximum amount allowed is $6,000, but that gives you plenty of room to make significant changes to your home that could save you even more money down the road.
The exact calculation the VA uses is as follows:
- Start with the outstanding loan amount on your existing VA loan
- Add any energy efficient changes the lender allows you to make
- This is your subtotal
- Add the discount based on the percentage the lender charges, for this example say 2% of the above amount
- Add the origination fee based on the percentage the lender charges, for this example say 1% of the above amount
- Add the appropriate funding fee based on the above subtotal, 0.50% of the loan amount
- Add any other allowed closing costs
- This is your new subtotal
- Take the new discount fee based on the new subtotal (2% of the new subtotal) and add it to the above subtotal
- This is the new subtotal
- Subtract the original discount fee figured originally
- This is the new subtotal
- Subtract the original funding fee figured above
- This is the new subtotal
- Figure the funding fee based on the above subtotal (0.5%)
- This is your new max loan amount
Minimizing your Loan Amount
So how do you make your new loan amount as close to the original balance as possible? You have to shop around. A majority of the fees in the new max loan amount are the fees the lender charges. Every lender charges different fees, so shopping around just makes sense.
Let’s say, for example, you find one lender that offers you an interest rate that is 0.25% higher than another lender, but the new lender does not charge any discount points or origination fees, but the original lender charges both at 2 points each. That is a significant difference in the amount you finance on the new loan. You will have to figure out if it makes sense based on how long you plan on staying in the home and how much of a difference it makes in the payment.
You also need to pay close attention to the terms that each lender offers. A majority of the time, VA Streamline Loans are fixed rate loans, but that is not always the case. Every lender can provide the type of loan they see fit for each situation. Understanding the full cost and the terms of the loan can help you determine what is right for you.
The max loan amount on a VA Streamline Loan should not hinder you from refinancing. If you want a lower interest rate or if you want to make energy-efficient changes to your home, it is well worth the effort to go through this loan. You do pay a new funding fee, but it is only 0.5% this time around, which on a $150,000 loan is only $750, which you can recoup right away if you are saving money every month with the new, lower mortgage payment.
