Things to Consider Before Applying for an IRRRL
There’s no such thing as the one perfect loan or refinance option that is the best option for every situation. As such, even though the IRRRL is very well-designed, and made to provide as much benefit as possible to VA borrowers, there are some needs that the IRRRL was designed to fill, and some that it was not. In this article, we’ll go over some of the things you’ll want to know before committing yourself to an IRRRL.
IRRRLs have limitations on when and for what purpose they can be used. For example, other than the $6,000 for energy-efficiency improvements, the borrower is not allowed to receive funds from the loan for anything other than the VA loan being refinanced. In other words, if you are wanting to refinance to pay off credit card debt, consolidate a second mortgage, or for any other reason, you will not be able to use an IRRRL to do so. This can sometimes be a major let-down to borrowers getting excited about the IRRRL, but this limitation makes a great deal of sense. As soon as you start talking about getting more money than is owed on the existing loan, things get more complicated, and any lender with half a brain is going to want the house to be re-appraised, a new credit report pulled, and all of the underwriting done that an IRRRL avoids.
If you’re wanting to go from a 15-year mortgage to a 30-year, you’ll also have some bad news. IRRRLs have a limit on the maximum loan term they can have. While the limit is fairly reasonable, you can’t go from a 15-year to a 30-year. The limit on an IRRRL is whatever the term of the original loan was plus 10 years, not to exceed 30 years and 32 days. In other words, a 15-year VA loan cannot be refinanced to anything longer than a 25-year with an IRRRL. Also, if there is a change to be made to the obligors on the loan (due to marriage, divorce, or other event), in many (but not all) cases an IRRRL is not permitted. Be sure to consult with a VA-approved lender if you are looking to add someone to the loan or take someone off and would like to use an IRRRL to do so, if possible. The reason for this limitation also comes down to the lack of new underwriting that takes place in an IRRRL. If the obligors on the loan have changed then so has the overall income and creditworthiness of the obligors as a whole. If there’s been a change then the VA and the lender need to make sure that the borrowers are still qualified for the loan.
It may seem odd that the requirement for a lower interest rate and lower monthly payment is waived if the loan being refinanced is an ARM, but there’s a very good reason for this, and if you currently have an ARM, you probably already know it. ARM loans typically have lower interest rates than fixed-rate loans, and fluctuate along with the market. Therefore, since an ARM loan could easily have a lower interest rate than what you’re using an IRRRL to refinance to, and this is no indication of an unwise decision on the part of the borrower or deceptive actions on the part of the lender, this is an acceptable situation. Using an IRRRL to refinance an ARM is the only exception to the lower interest rate rule, but there are two more cases where the principal+interest monthly payment may be allowed to be higher. These two cases are when the new term of the IRRRL is shorter than the loan being refinanced, and if energy efficiency improvements are included in the loan.
Some of the benefits of an IRRRL come with hidden barbs. For example, the ability to roll closing costs into the loan amount may seem like a fantastic option, but you’re charged interest on that amount along with the rest of the principal. So if you roll $4,000 of closing costs into the loan, you’ll probably pay between $6,000-$8,000 on them throughout the life of the loan depending on your interest rate. In other words, if you have the money on hand, it’s best to just front the cash for closing costs for the same reason it’s smarter to pay as large a down payment as you can afford.