Do you have a VA loan and want to lower your monthly mortgage payments? A VA Streamline Refinancing or Interest Rate Reduction Refinance Loan (IRRRL) could be viable. It comes with several benefits, minimum documentation requirements and a simplistic lending process.
This comprehensive guide explores the specifics of this mortgage product, including its key advantages, downsides, eligibility guidelines and application process.
What is VA Streamline Refinance?
A VA Streamline Refinance is a mortgage product backed by the Department of Veterans Affairs (VA). It’s designed to help VA borrowers secure better mortgage terms without providing extensive paperwork or meeting stringent lending requirements.
How VA Streamline Refinance Works
If you’re approved for a VA Streamline Refinance loan, it will replace your current mortgage with a new loan – typically with a lower interest rate and more affordable loan payment. Refinancing with a VA IRRRL also resets the loan term to a term of 15 or 30 years.
You can also refinance using this loan product to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Doing so gives you more predictable monthly mortgage payments.
As with other VA-backed home loans, a funding fee applies. In this case, it’s just 0.5% of the loan amount. You don’t have to pay it at closing, though, as you can opt to roll it into the principal balance and pay it over the loan term.
How Does a VA Streamline Refinance Compare with Other Refinance Options?
VA Streamline Refinances are known for their simplicity and streamlined lending process. Here’s how they stack up to other comparable refinance options:
- FHA Streamline Refinance: The FHA Streamline Refinance also offers a simplified process with reduced documentation and underwriting requirements. However, it typically requires mortgage insurance premiums, which can increase overall costs compared to a VA Streamline Refinance. Furthermore, you must have an FHA loan to qualify.
- HARP Refinance: The HARP (Home Affordable Refinance Program) was designed to help homeowners refinance their mortgages even if they owe more than the home’s current value. Unlike the VA Streamline Refinance, HARP is not limited to veterans and does not require a VA loan, but it ended in 2018 and has been replaced by other programs.
- USDA Streamline Refinance: This option is available to rural homeowners with USDA loans and features a streamlined lending process similar to the VA Streamline Refinance. However, it is limited to properties in eligible rural areas and may have income restrictions, which are not factors in VA Streamline Refinances.
What are the Advantages of VA Streamline Refinance?
Evaluating the key benefits and drawbacks is vital before deciding if a VA streamline refinance is right for you. Below are some reasons why these loans are worth considering.
Lower Interest Rates
A major selling point for these types of refinances is the lower interest rates. In fact, a primary reason these loans exist is to help borrowers move from a higher rate to a lower one, which can lead to considerable cost savings over the life of the loan.
Reduced Monthly Payments
To piggyback off the last point, lowering your interest can significantly affect your monthly mortgage payments. An interest rate reduction of just 0.5% and 1% can save you several thousands of dollars in borrowing costs.
No Appraisal or Home Inspection Required
Most lenders require a home appraisal for home refinances. However, the VA waives this requirement for VA IRRRLs to save you time and money and simplify the lending process. This can be a major plus if your home value has recently dipped.
Simplified Application Process
As previously mentioned, VA Streamline Refinances feature a simplified application process. You won’t have to worry about providing the lender with a mountain of paperwork, which can help you get to the closing table more quickly.
Potential Drawbacks to Consider
As with any mortgage product, there are also downsides to consider when deciding whether to apply for a VA IRRRL.
Funding Fee and Other Costs
Again, the VA funding fee of 0.5% is tacked onto Streamline Refinance transactions, and you’ll incur closing costs. The good news is you can include some of these expenses into the loan balance to avoid paying upfront.
No Cash-Out Option
If you have a sizable amount of equity you want to convert into cash, you won’t have that option with a VA Streamline Refinance. Instead, you’ll need to explore the VA cash-out refinance loan that comes with more stringent lending guidelines.
Remaining Loan Tenure
Refinancing your VA loan resets the repayment period. Even if you can get a much lower interest rate, your borrowing costs could be significantly higher over the life of the loan. Depending on the amount you’re actually able to save monthly, the increased costs may outweigh the benefits of saving a few dollars on your mortgage payments.
What are the Eligibility Requirements for VA Streamline Refinance?
Below is a closer look at the lending criteria you need to meet to qualify for a VA IRRRL.
Basic Eligibility Criteria
To qualify, you must have an existing VA loan in good standing. The VA also requires a valid reason for refinancing or a tangible benefit, like reducing your monthly mortgage payments or switching from an ARM to a fixed-rate mortgage.
Service Requirements
You must also meet military service requirements to qualify. Lenders will request your Certificate of Eligibility (COE) to confirm your time service meets the program guidelines for your branch of service.
Property Requirements
The property you want to refinance should be your primary residence. VA-backed loans cannot be used to purchase or refinance second homes or investment properties.
Credit Score and Financial Requirements
There’s no minimum credit score requirement for VA Streamline Refinances, and lenders also aren’t required to check your credit score. This can be a significant upside if your credit score is lower.
Applying for a VA Streamline Refinance
Before applying for VA Streamline Refinance, here’s what else you need to know.
Required Documentation
You’ll need to have the details for your current VA loan handy, along with your COE, and the loan must be at least 6 months old. It’s important to note that although credit checks aren’t mandatory, you must not have any late payments on your VA loan in the past 6 months. And if there are late payments, you can only have one 30-day late payment in the past 12 months.
Costs and Fees Associated
Again, prepare to pay closing costs and the VA funding fee. The VA limits the amount lenders can charge for closing costs, and you can roll the VA funding fee into your new loan.
Loan Terms
As previously stated, you’ll get a new loan term of 15 or 30 years. This means the loan term will reset, so be mindful that you could spend more in interest, even if your monthly mortgage payments are significantly reduced since the lender will have more time to collect from you.
Current Interest Rates
The interest rates on VA Streamline Refinances vary by lender. That said, VA loans generally have more competitive rates than traditional mortgage products.
Typical Timeline
You’ll also enjoy a faster lending timeline compared to other forms of refinancing. Remember, an appraisal isn’t required, and lenders don’t need many documents to approve you for a loan. Expect the process to take a few weeks from start to finish.
Conclusion: Is a VA Streamline Refinance Worth It?
A VA Streamline Refinance, or VA IRRRL, can offer significant benefits, such as lowering your interest rate, which equates to more affordable monthly payments and long-term cost savings. The process is typically more straightforward and faster than other traditional refinancing options, often requiring no appraisal and less paperwork.
You can also switch from an adjustable-rate mortgage to a fixed-rate loan to help make it easier to manage your monthly mortgage payment. Plus, you can roll the funding fee and closing costs into the loan to reduce out-of-pocket expenses.
Even with all the benefits these loans offer, it’s important to consider your personal financial situation and calculate the break-even point. Doing so helps you determine if the potential savings justify the costs involved with a VA Streamline Refinance or if you should hold off.
