Let's Get Started!

How to understand the VA IRRRL

I did several VA IRRRLs when I was active duty, last one at NORAD/NORTHCOM and never really understood how to properly evaluate this unique streamline refinance product, so I totally understand the confusion this subject can cause. Now that I routinely help Veterans in the local El Paso County area, like Peterson Space Force Base, Schriever Space Force Base, US Air Force Academy, and Fort Carson, as well as Veterans living in the El Paso and Denver communities at large, I wanted to take a minute to go into some of the details.

Is a loan that drops your interest rate by 1% better than one that drops it by only 0.5%?

What if the first one cost you $8,000, but the second one cost you next to nothing because the closing costs are covered by the lender credit? How does the VA FUnding fee play into this evaluation?

Lots of variables at work here, including your goals, so let's break it down into sometimes competing elements.

Here is a list of the moving parts that make this difficult to evaluate:

• How much does it cost?

• What are the fixed closing costs?

• What is my priority - skipping payments to catch up on bills or not skip a beat and lower payment?

• How long does it take to recoup the cost of the refi and how much do I save?

• How long do you plan to own this house?

• Does the new loan meet the VA Net Tangible Benefit rules? *

How to Calculate Your VA IRRRL Recoup Period

The "recoup period" is the most important metric for determining if a VA streamline refinance is worth it. It measures how many months of savings it takes to pay back the cost of the refinance.

The VA Recoup Formula:

Total Closing Costs ÷ Monthly Savings = Months to Recoup

Example Calculation: If your total closing costs (including the VA Funding Fee) are $4,000 and your new lower interest rate reduces your payment by $200 per month, your recoup period is 20 months. Is that worth it? Only you can answer that one, but for reference the VA has a max recoup of 36 months, and most of my VA refis recoup in under a year.

The costs of the refinance are:

• the fixed closing costs

• optional discount points

• the funding fee, if applicable

• any prepaid interest

Not included in the cost calculation are the escrows, taxes and insurance. Even though you have to fund a new escrow account, the escrows are items you would pay regardless of whether you did the refinance or not. Those do not count as closing costs. However, they can affect the monthly savings in the following two ways:

• If you add the escrows to the loan balance, that will lower the monthly savings to the tune of about $6-7 in increased monthly payment for every thousand dollars added to the loan

• If we are refinancing with the same lender, it is possible to "net the escrows" so that the existing escrow balance is reduced from the payoff, so adding the new escrow balance to the new loan will have a net neutral impact

*Quick note on the VA Net Tangible Benefit Rules -

To protect Veterans from "loan churning," the VA requires that a refinance provides a clear financial advantage.

Here are the strict requirements for a VA IRRRL:

• Interest Rate Reduction: Your new interest rate must be at least 0.50% lower for a fixed-to-fixed refinance, or 2.0% lower if moving from a fixed-rate to an ARM.

• 36-Month Recoupment: All closing costs, fees, and expenses must be "recouped" (earned back) through your monthly savings within 36 months.

• The Safe Harbor Rule: At least 210 days must have passed since your first mortgage payment, and you must have made at least six consecutive monthly payments.

• No Appraisal Required: Unlike most refinances, the VA IRRRL does not require a new appraisal, meaning your home's current value won't stop you from lowering your rate.

Watch out for gimmicky practices/phrases from flyer and online lender solicitations!

• Many predatory lenders lead with: "Refinance now and skip two months of payments!" * The Reality: You never actually skip a payment. The interest is simply rolled into the new loan balance, meaning the veteran pays interest on those "skipped" months for the next 30 years.

• "Drop your interest rate by 2%! " * The Reality: you will be paying for those two discount points for the next few years, so it won't pay off for a long time period. Rates may well be much lower in that time frame

• If it looks like an official government check or an "Urgent Notice," it’s almost certainly a predatory lead-gen company.

• "Free Refi! * The Reality No refi is free. If there are "no closing costs," your interest rate is likely much higher than it needs to be to pay for those "free" costs.

Now that we have talked about VA roles in general, let's look at your specific situation. In the survey form below, I ask some questions about what your priorities are. How you answer will help me develop loan options that meet your needs . The last step in the survey is to upload your current mortgage statement. This is purely optional. Or and if you prefer, you can always just email it to me at [email protected]