Low Interest Rate Market? VA Loan? Try an IRRRL

Let’s set the stage… You got a VA loan a few years ago at 4.5% interest. Your credit was decent and rates were good. But you look at today’s rates and you talk to your lender. It’s possible to refinance your VA loan at 3.5%. If you run the numbers that’s $58.00 per month, per $100,000 on a 30 year loan. Does this sound too good to be true? It’s actually possible with a thing called an interest rate reduction refinance loan or IRRRL.

Today we have the pleasure of a guest writer who is a licensed lender in all 50 states with a specialization in VA loans. Patton Gade is a former Army officer and UH60 pilot. He also does conventional and FHA purchases/refinances.  He can be reached at 623-866-3974 or pgade@paramountbank.com. Let’s see what insights he provides on the IRRRL:

The Interest Rate Reduction Refinance Loan (IRRRL) is one of the best features of having used a VA loan to purchase your home.  If the prevailing interest rates have dropped since the purchase of your home, it may be worth looking at your options.  

A couple of key facts about an IRRRL:

• Your interest rate must drop at least 0.5% (going from a fixed rate to a fixed rate loan.  Some different rules apply for ARMs)
• The total fees (bank fees + title fees) must be less than the amount of your reduction in P&I payment X 36 months  (for example, if your P&I payment drops by $100/month, your total fees cannot exceed $3,600)
• As a streamlined loan, it will not require income verification (paystubs/tax returns/W2s) in most cases.  Some exceptions apply.
• In most cases, an IRRRL can be done without an appraisal.
• An IRRRL can still be done if the house is currently worth less than the loan you have.
• While a VA purchase or cash out loan can only be done on your primary residence, an IRRRL can be done even if you have converted that property to a rental property after a PCS.  You also don’t pay higher investment property interest rates like you do with a conventional loan.
• VA funding fee is only 0.5% unless it is being waived due to a VA disability or a Purple Heart.
• Maximum cash back on an IRRRL is $500 (except TX where it is $0)

Is a VA IRRRL worth doing?

• You need to evaluate the costs of the IRRRL versus the benefit.  What are your long term plans for the property?  Do you plan on keeping the property for a long time or are you selling it when you PCS?
  • Your current loan balance will go up when you refinance although you should be able to do the loan with no cash out of your pocket.
    • New loan balance will be as follows:   Current payoff + bank fees + title fees + VA funding fee + new escrow account
    • Example:  Current loan is $150,000.   Bank fees of $1,000.   Title fees of $1,500.  VA funding fee of $750.   New escrow account $750.   Your new loan amount is going to be $154,000.
    • If your current rate was 4.25% and you have 27 years left to pay off the $150,000, your current principle and interest (P&I) payment is about $779/mo.  Your new loan is now $154,000 at 3.25% for 30 years.  Your P&I payment is $670/mo for a total savings of $109/mo.  Your max fees can be $109 x 36 months = $3,916.  In this example, your total bank fees of $1,000 and title fees of $1500 are less than the $3,916.  This loan would be legal and may make sense to do.
  • Keep in mind……if you are selling this house in the next couple years, your loan balance when you sell is going to be higher than if you just keep your current loan.  So that is less cash in your pocket when you sell.  You need to weigh that against the monthly cash flow before deciding to do it.
• Let’s use the example above:  Say you know you are selling the house in 2 years.  24 months x $109 per month is only $2,616 in monthly savings over 2 years.  You added $4,000 to your loan balance.  Essentially you have lost about $1,384, right?  Not necessarily.   Anytime you refinance a home, you will end up “skipping” a payment.  This is really just deferring a payment and adding that payment onto the end of the term.  You will also get a refund of what is currently in your escrow account.  So let’s say your current payment, interest, taxes, and insurance (PITI) payment is $1,100/mo and your escrow account has about $600 in it.  The one skipped payment and the escrow refund will put $1,700 in your pocket today.  You will also save $109/mo in your monthly payment.  So in cash flow terms, you net $1,700 + $2,616 = $4,316 over the next 2 years.  That makes it worth it to do the IRRRL even if you are only staying in the home for 2 years.
• How can you really get ahead with an IRRL?  Save that “skipped” payment and your escrow refund and  pay that money back as an extra principal payment along with your first payment.  Then keep making the same payment you make today.  That extra $109/mo will actually be paying down your principal balance.  You have now actually cut your new 30 year loan down to a 23 year loan with the same payment as what you have currently with 27 years left on it.  That’s a heck of a deal!

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