Refinancing without verifying your income or credit score sounds impossible. If you are a veteran with a VA loan, it is possible. The Interest Rate Reduction Refinance Loan makes it easy for veterans to refinance. The program offers the opportunity to save money each month. Here we look at the types of mortgage loans available under this program.
Choose Your Term
VA loans come in various terms. The most common is the 30-year term. Borrowers love this program because it offers the lowest payment. However, you pay the most interest with this loan. The longer you borrow the money from the bank, the more interest you pay. Because the VA IRRRL offers the chance to lower your rate, consider other options.
Most banks offer the VA loan in 15 or 30-year terms. 30-year is the most comfortable option. However, consider the benefits of the 15-year term. While you pay more each month, you pay the loan off faster. You will pay almost half of the amount of interest on the loan if you opt for the 15-year term.
If you already had a 30-year loan, refinancing into another 30-year term puts you back at square one. At the very least, consider finding a lender that will amortize your loan over 25 years rather than 30. This will not make a huge difference in your payment, but will avoid adding too much time to your loan.
Keep in mind, though, the VA does not allow lenders to extend the new term more than 10 years beyond the current term. For example, if you have a 15-year term now, the max term you can refinance into is a 25-year term.
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Choose Your Mortgage Loan Type
The most common mortgage loan type for the VA IRRRL is the fixed rate loan. This offers the most predictability for borrowers. However, ARMs have their benefits too. You get the lower rate for the first few years of the loan. This helps many borrowers afford their loan. The VA does allow adjustable rate loans too.
If you currently have an ARM and want to refinance out of it, you may experience an increase in your payment. This seems to go against the requirements of the VA loan. The idea of the program is to help borrowers lower their payment. However, this doesn’t occur in every case. Following are the most common exceptions to the rule:
- Refinancing from an ARM to a fixed rate
- Decreasing the term of the loan
- Adding closing costs into the loan
- Adding the funding fee into the loan
Just concern yourself with the amount of the increase. If your payment goes up more than 20%, then you may have to verify you can afford the payment. This takes away the benefit of the VA IRRRL program which doesn’t require income or credit score verification. Lenders are required to show the VA you can afford the higher payment, though.
Qualifying for the VA IRRRL
Whether you want to lower your interest rate, change your term, or change the loan, the same requirements apply. The program itself is very simple as long as you meet the following requirements:
- Timely mortgage payments for the last 12 months (only one 30-day late payment is allowed and it can’t be within the last 3 months)
- No cashout
- If you have a second mortgage, the lender must agree to subordinate
- You must prove you lived in the home prior to applying for the VA IRRRL
This is all the VA requires. You don’t need an appraisal or to have your credit pulled. The lender can use your original appraised value and credit score. However, not all lenders agree to this. Some want to see your current credit score or the value of your home. This way they can protect their investment. Because the VA provides a guarantee on the VA IRRRL just like they did with the original VA loan, though, the lender is protected.
Underwater Homeowners Benefit
Underwater homeowners are those who owe more than their home is worth. Generally, they can’t refinance because they owe too much. This is usually no fault of the homeowner – the value of their home just never came back from the hit the industry took. However, with this program, it is possible. You can owe more than the value of your home and still get a lower payment.
This might seem strange, but it makes sense. The VA confirms that you made your previous 12 months of payments on time. These payments should be higher than the new VA IRRRL payment. Since you could afford the higher payments, you can afford the lower ones. With less interest to pay, you will start paying the principal you owe down. You will then start to own more of your home than you would if you stayed with the higher interest rate.
Decide if Refinancing is Right
A decision you must make is if it is worth refinancing. No matter how low you can get your interest rate, it may not make sense. Every loan has closing costs. In addition, the VA IRRRL has a funding fee. You pay these at the closing. While you can roll them into the loan, it doesn’t make sense to because it will increase your payment. Either way, they increase the cost of the loan.
In order to determine if it makes sense to refinance, you must figure out your recapture period. This is the time it takes to recapture the closing costs. In other words, the difference between your new and old mortgage payment is your savings. You need this amount and the total of your closing costs to determine your recapture period. Use the following formula:
Closing costs/Savings = Number of months it will take to recapture the closing costs
Let’s say your recapture period is 36 months and you plan to move in two years. You won’t realize the savings of refinancing. In this case, it makes sense to not refinance. If, however, you weren’t going to move for 10 years, the refinance would make sense.
Just like any other loan, shop around to find the best deal for the VA IRRRL program. Every lender has different rates and costs. Find the deal that is best for you in order to make the most of your refinance.
