And if you have a mortgage through the U.S. Department of Veteran Affairs (VA), there’s a special loan you should consider: Interest Rate Reduction Refinance Loan (IRRRL).
Veterans and active military may be eligible for the IRRRL program, which allows VA loan holders to refinance to a lower interest rate or lower monthly payment. These loans are especially appealing for anyone who doesn’t have the financial profile to qualify for a traditional refinance.
What Is an Interest Rate Reduction Refinance Loan?
An Interest Rate Reduction Refinance Loan (IRRRL), also known as a “streamline” refinance, allows you to refinance your VA-backed home loan to make your monthly payments more affordable through a potentially lower interest rate — or by switching from an adjustable rate to a fixed rate. You’d need to apply for an IRRRL through a bank, credit union, or mortgage company, rather than through the VA.
Refinancing while rates are down could make your monthly payments more affordable, if you have good credit and can afford the fees and closing costs that come with this loan. “It may make sense to do it now instead of wait,” says Michael Foguth, president and founder of Foguth Financial Group in Brighton, Michigan.
Other experts agree with this sentiment. “If people can [refinance], even if they haven’t had a hiccup with their jobs, they might as well,” agrees Jacqueline Cooper, president and executive director of Financial Education Associates.
When an Interest Rate Reduction Refinance Loan Makes Sense
You may not necessarily get the lowest refinance rate with an IRRRL, according to Seth Feinman, vice president and licensed mortgage loan originator at Silver Fin Capital in the New York metro area. With interest rates already so low for all mortgages, there are more options on the market for people who have good credit scores, above 640 ideally, says Feinman.
“Only someone who may not have the income to normally qualify [for a conventional refinance] could look at IRRRL,” Feinman says, citing the simplified documentation and verification process for income, employment, and assets. Otherwise, it’s best to shop around and compare IRRRL with the variety of other refinancing options available for VA-backed loans.
Consider refinancing your home to take advantage of historically low interest rates. Just keep in mind what fees and closing costs you’ll have to pay on the backend.
As part of getting an IRRRL, you may have to pay an one-time 0.5% funding fee, which offsets the VA’s costs of not requiring you to get mortgage insurance or make a down payment. There are some exemptions for the funding fee, but most veterans can expect to pay this, which can be paid in full at closing or over time. You’ll also have to pay other closing costs and interest on the loan, which will vary depending on the lender you choose.
What Are the Eligibility Requirements?
To get an IRRRL, you must meet all of the following requirements:
- You already have a VA-backed home loan. VA loans are available only to veterans, service members, surviving spouses, and other qualifying people associated with the military and National Guard or Reserves. For eligibility, see who is able to get the Certificate of Eligibility (COE) that is required for a VA-backed loan.
- You plan to use the IRRRL to refinance that VA-backed home loan. IRRRLs cannot be used to refinance mortgages on other homes.
- You can prove that you lived or have lived in the home covered by the loan. Homes that are purely investment properties would not be eligible for this loan.
How to Apply for an Interest Rate Reduction Refinance Loan
- Do your research. To get an IRRRL, you’ll have to ask for estimates from direct lenders, such as a bank, credit union, or mortgage company, or a broker. You can’t get an IRRRL directly from the VA.
- Track down your Certificate of Eligibility (COE). You’ll need to give your original COE to your lender to prove you qualify for the loan. If you don’t have the original, you can ask your lender to get it electronically through the VA Home Loan program portal.
- Close on the IRRRL, per your lender’s guidelines. You may have to pay a funding fee, as well as closing costs and interest on the loan.