If you are a veteran, one of the least expensive ways for you to refinance your VA loan is with the VA IRRRL. This loan only requires that you have a current VA loan that you pay on time (for the last 12 months) and that you have a net tangible benefit for the loan. The net tangible benefit is where many veterans get caught up. They think they need to have a specific interest rate in order to get approved.
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Luckily, you don’t need to lower your rate a specific amount. As long as you have some type of savings, you may qualify for the loan.
What Type of Savings do you Need?
Technically, your mortgage payment should decrease if you want to get approved for the VA IRRRL. That’s the main premise of the loan. It requires little verification because veterans are supposed to be able to refinance and get a lower payment. If they already proved they can afford the larger payment, it makes sense that they would be able to afford the new, lower monthly mortgage payment.
The VA does not state how much a borrower must save though. This is really a personal preference. At what point does it make sense for you to pay closing costs to lower your interest rate? If you don’t save enough, it may not be worth it.
We recommend determining the break-even point to determine if it’s worth it for you to refinance.
The Lower Rate and the Break-Even Point
When you refinance, you pay closing costs. This takes away from your savings. Let’s say you would save $100 per month by refinancing. Let’s also say that the new loan costs you $4,000 in closing costs. Essentially, you would not start realizing the savings of the loan for the first 40 months. The $100 savings would take you 40 months to pay off that $4,000.
If you don’t think you will live in the home much longer than 40 months, it may not make sense for you to refinance. If, however, you think you will live in the home for much longer than 40 months, it may make sense for you to refinance.
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What Other Benefits Matter?
The VA does allow veterans to refinance with the VA IRRRL for reasons other than a lower rate. Some borrowers even have a higher interest rate when it’s all said and done. It depends on the situation you are in right now.
For example, if your current VA loan is an adjustable rate loan, you run the risk of the rate adjusting much higher than it is right now. That may put your loan at risk of default. If you are able to refinance out of that ARM and into a fixed rate loan you may benefit. The VA benefits as well as it lowers your risk of default. Since your ARM rate may have been lower as an introductory rate than the interest rate you can get now, your payment may increase.
This may also happen if you refinance from a 30-year term into a shorter term, such as a 15 or 20-year term. The VA allows these situations as a benefit. They do require, though, that your payment does not increase more than 20% more than the original payment. If it does increase more than 20%, then you will have to use the fully verified cash-out VA refinance.
Refinancing with the VA IRRRL is a simple way to refinance. Before you jump on board, though, make sure that you benefit from the new loan even after paying the closing costs. Taking a close look at the break-even point will help you determine if the new loan is worth it for you.
