The VA IRRRL program is a great way to refinance your current VA loan. You don’t have to verify your income, assets, credit score, or home value. What’s not to love, right?
While it is a great program, there are some downsides that you may want to consider before making a decision for yourself.
You Can’t Tap Into Your Home’s Equity
Does your home have equity? If you were planning to take any of it out as cash, you can’t use the VA IRRRL program. The VA IRRRL program is only for those that want to lower their interest rate or change their loan’s term for the better. It isn’t for those that want to take cash out.
The VA only allows you to borrow the total amount of your outstanding principal balance on your loan, plus any allowed closing costs, and the VA funding fee. In some cases, you may be able to include any late fees that exist on your account as well, as long as you are up-to-date on your payments as of the date that you refinance.
If you want to tap into your home’s equity, though, and receive cash in hand, you will have to opt for the VA cash-out refinance, which requires you to verify all aspects of your application, including your credit score, income, and home value.
You Must Benefit From the Refinance
It makes sense that the VA wants you to benefit from the refinance, but you may have to meet the lender’s standard too. While there’s no sense in refinancing if you don’t save enough money, your lender has the final say on whether your ‘net tangible benefit’ qualifies.
Typically, if you can lower your interest rate and/or your payment, you qualify, but you have to prove that you benefit from it. Lenders want to know that it makes sense to give you a new loan. While the VA doesn’t state exactly how much you must save in order to qualify, each lender may have their own requirements.
You Have to Pay Closing Costs
Every loan has closing costs in some shape or form, whether you pay the fees upfront or you let the lender pay them and you take a higher interest rate. With the VA IRRRL, there isn’t much of an opportunity to take the higher interest rate, because then you lose your chance for the net tangible benefit.
This leaves you with the need to pay the closing costs. While VA closing costs tend to be a little less than the closing costs of other loans, they usually still amount to a few thousand dollars. This could deplete the benefit that you receive from refinancing.
In addition to the lender and third-party closing costs that you have to pay, there is the VA funding fee that you must pay too. The VA funding fee for the VA IRRRL is lower than when you bought the home, though. This time around, you will pay 0.5% of the loan amount rather than 2.15%, which is a nice savings.
Restarting the Loan Term
The final disadvantage is that you could end up right where you started as far as the loan’s term goes. If you already paid a few years on your loan and now you take out a loan with the same term, you just added those years back onto your term.
If you can afford it, you may want to opt for a shorter term. You’ll just have to make sure that you can afford the higher payment that comes with a shorter term. While you will probably benefit from a lower interest rate with the shorter term, your payment will include a larger percentage of the loan’s principal because you have less time to pay it off in full.
The VA IRRRL is a great program that can help veterans refinance their mortgage, especially if they are upside down on their loan. These disadvantages are just to make you aware of the downside of the program and to help you weigh the pros and cons to make sure that it’s a good fit for you.