One of the most powerful benefits in the VA loan program is the Interest Rate Reduction Refinance Loan, or IRRRL, which is the VA’s streamline refinance option.
The IRRRL is a refinance option designed to be a cheap, easy, and quick way for you to refinance your loan and get a lower interest rate.
How the VA Streamline Refinance Can Save You Money
There are three main ways that the IRRRL can save you money both in the long run and the short run.
The IRRRL Can Help You Secure a Lower Interest Rate
As the name implies, this is the main purpose of the IRRRL.In fact, the VA will not allow an IRRRL to take place unless the borrower is provided “substantial net benefit”. The VA considers a lower interest rate substantial net benefit, but also a shorter loan term (we’ll talk more about that later in this article), or refinancing from an ARM to a fixed-rate. Using an IRRRL to obtain a lower interest rate is much quicker and easier than using a normal refinance (usually referred to as a cash-out refinance even if no cash is being taken out). No appraisal is required, and no credit underwriting package is required on IRRRLs. Where a normal refinance can take 30-60 days, an IRRRL can be started and finished in as little as 10 days.
The IRRRL is Cheaper than a Cash-out Refinance
There’s two ways that the IRRRL can be considered cheaper than a cash-out refinance. The first is the IRRRL’s true no out-of-pocket option. You still have closing costs and the VA funding fee, but the IRRRL allows you to roll every dime into the loan amount if you choose. This means you can take advantage of lower interest rates right now even if you’re strapped for cash – and that’s exactly why the VA made the IRRRL this way. The second way is that closing costs are generally lower on an IRRRL than on a cash-out refinance. Since no appraisal is required, you obviously don’t have to pay for one, and you don’t have to pay for credit underwriting. Closing costs vary from lender to lender, but IRRRLs will usually have lower closing costs than cash-out refinances.
The IRRRL Can Help You Secure a Shorter Loan Term
The VA allows a borrower to use an IRRRL to drop from a 30-year loan term to a 15-year loan term, even if the interest rate does not lower as a result (though it often will). Many borrowers start out with a 30-year fixed because they feel like that’s the simplest and safest option. In fact, the 30-year fixed results in the most money paid in interest of any loan option you can get. Interest rates are not only higher on 30-year fixed, they’re also assessed for a lot longer. Consider this example: Let’s say you are buying a home in Utah for $300,000. As of today, you could get an interest rate of 3.95% on a 30-year fixed, or an interest rate of 3.22% on a 15-year fixed. If you chose the 30-year fixed, you would pay interest of $212,500.21 over the life of the loan. If you chose the 15-year fixed, you would pay only $78,654.27 in total interest over the life of the loan. This is because not only is the interest rate lower, but the amount of years it is assessed on the remaining amount is cut in half. Now, you might assume that if you’re cutting your loan term in half then your monthly payment is going to double. This is not the case. On the 30-year fixed in this example, the monthly principal+interest payment would be $1,423.61. On the 15-year fixed, the monthly payment would be $2,103.63. That is certainly higher, and by $700, but it is not double. If you can manage the higher monthly payment, you can really save a lot of money by using an IRRRL to drop to a 15-year fixed.
So, an IRRRL can help you save money by providing a quick and accessible way to obtain a lower interest rate on your current mortgage, by allowing you to roll closing costs into the loan and making total closing costs lower than on a cash-out refinance, and by helping you secure a shorter loan term.