Reduce Closing Costs with a VA Streamline Refinance
Closing costs can add thousands of dollars to the principal of your home loan. Or, they can drain your savings account if you pay them out of pocket.
But VA homeowners can save on closing costs with the VA’s streamline refinance program.
Also called the VA IRRRL (VA Interest Rate Reduction Refinance Loan), this loan program limits the closing costs lenders can charge while also requiring a smaller VA funding fee.Check your VA streamline refinance rates. Start here (Mar 23rd, 2023)
VA IRRRL closing costs
Closing costs pay for a variety of services you’ll need to finalize your new home loan. But they’re not an exact science; they vary some by borrower and lender.
On average, IRRRL closing costs add up to at least 2% of your loan amount. They could reach as high as 5% or even higher in some unusual cases.
An IRRRL’s closing costs include:
- VA funding fee: For the IRRRL, your funding fee will equal 0.5% of your loan amount. On a $200,000 refi, 0.5% equals $1,000.
- Lenders fees: Your VA-authorized lender can charge up to 1% of your loan amount to cover its administrative fees and services. Many lenders call this your loan origination fee; for a $200,000 loan, 1% equals $2,000.
- Discount points: You could buy a lower interest rate through discount points. One point costs 1% of your loan amount and lowers your rate by 0.25%. If you choose to buy points, the VA will let you finance up to 2 points into your new refinance loan’s amount.
- Prepaid taxes and insurance: Depending on what time of year you close, you may need to prepay part of your annual property tax and homeowners insurance bills.
- Title examination fee: An attorney will charge a fee to research the ownership history of your home. The goal is to make sure no one else can claim ownership.
- Title insurance fees: This coverage protects your investment in case someone can claim to own all, or part, of your home later.
- Flood zone assessment: Homes located inside flood zones require special flood insurance coverage. This assessment will determine whether you need flood insurance.
- Recording fee: This administrative fee comes from your local government. It covers the cost of recording your real estate transaction in the county’s register of deeds.
Unlike most new mortgage loans, the VA IRRRL program does not require a new home appraisal or a credit report fee. This — along with the lower VA funding fee and the 1% cap on lenders’ fees — helps create this loan’s closing cost savings.
VA Loan closing cost savings
Closing costs can vary drastically by lender within the VA home loan program. Sometimes, lenders use higher closing costs to compensate for a lower interest rate. This can happen for homebuyers and refinancers.
Be sure to research these expenses by reading the lender’s Loan Estimate form carefully. This form will break down the costs for you. Closing costs can add up quickly, and you want to make sure they don’t offset the savings you’ll gain from your refinance loan’s lower monthly payment.
The good news for VA streamline refinance borrowers is that many traditional closing fees do not apply or are not allowed to be charged to veterans.
For starters, VA streamline refinancing does not require a home appraisal, so right off the top, that knocks off around $500 from the total closing costs.
Check your VA refinance rates. Start here (Mar 23rd, 2023)
VA IRRRL eligibility requirements
Not all homeowners can qualify for the VA IRRRL program and take advantage of its lower closing costs. To be eligible, you must:
- Already have a VA loan: Streamline refinancing works only on mortgage loans of the same type
- Be able to gain from the loan: The VA calls your gain a “net tangible benefit.” Locking in a lower interest rate, a lower mortgage payment, or switching from an adjustable-rate mortgage to a fixed-rate loan counts as net tangible benefits
- Use the home as your primary residence: The VA home loan program exists to help buy and refinance primary residences but not investment properties or vacation homes
- Be up to date on payments: You won’t be able to refinance your loan if you’re behind on payments
- Wait six months: The VA requires a 210-day waiting period before it’ll replace an existing loan with a new one. For most homeowners, this leaves time to make six mortgage payments
If you can check all these boxes, you’re an ideal candidate for a new VA IRRRL loan.
VA IRRRL loan benefits
Along with lower closing costs, the VA IRRRL program has other benefits for homeowners who already have a VA loan:
- Streamline refinancing moves quickly: You could close within a month of applying. The VA lender does not have to review W2s, paystubs, tax returns, or bank statements, which speeds up the process
- You won’t need a credit check: The VA doesn’t require a credit report check, so if your credit score has dropped, your lower score doesn’t have to affect your new loan’s interest rate. (Lenders may require a check even though the VA doesn’t, so be sure to ask)
- You can get a shorter rate lock: A shorter loan process means borrowers need a short loan lock. The shorter the lock, the cheaper the rate lock fee. So a borrower who locks their VA streamline mortgage rate for 30 days will pay less than someone who has to lock for 45 or 60 days
- The VA limits lenders’ fees: The Department of Veterans Affairs won’t allow lenders to charge active-duty service members and veterans many common lending fees. These include escrow fees, which usually amount to hundreds of dollars, and a variety of processing and underwriting fees
- No need for a COE: Since the IRRRL works only if you already have a VA loan, there’s no need to track down your Certificate of Eligibility. You’re obviously eligible for the VA home loan program since you already have a VA loan
Compared to other refinance loans — including the VA cash-out refinance — the IRRRL is usually faster and less expensive to finalize. It exists to help existing VA homeowners lower their rates, lower their monthly payments or both.
VA IRRRL vs VA cash-out refinance
The Department of Veterans Affairs offers two refinance options: the streamline (IRRRL) refinance and the VA cash-out refinance. Which loan do you need?
These two refinance loans have different purposes. If you:
- Already have a VA loan and want to lower its rate or payment: The IRRRL is the product for you
- Want to refinance any type of mortgage into a new VA loan: You’ll need to get a VA cash-out refinance loan
As its name indicates, the cash-out refi lets you borrow against your home equity while also refinancing your entire mortgage.
The cash-out loan also requires an appraisal, a credit check, and a full VA funding fee just like a home purchase loan. You’ll have to go through your lender’s underwriting process. As a result, the VA cash-out refinance racks up more closing costs.
VA refinance loan closing costs vs conventional refinance closing costs
Veterans and active-duty service members can also refinance their mortgages with conventional loans — if they qualify. In fact, if you aren’t using your VA-backed home as a primary residence anymore, you’ll have to choose a conventional refinance.
A conventional refinance loan will almost always require homeowners to complete the underwriting process again. This means higher fees and closing costs compared to a VA IRRRL.
Unlike FHA, USDA, and VA loans, conventional loans do not offer streamline refinances.
Still, you could save money refinancing into a conventional loan if:
- You own enough equity: If you made a large down payment or you’ve paid down your home loan by at least 20% of your home’s value, you can refinance without paying annual mortgage insurance premiums
- You have excellent credit: Since you won’t have the VA’s backing, you’ll qualify for a conventional loan based on your own borrowing credentials alone. If you have excellent credit, you can qualify for a low interest rate and APR
To find out for sure whether you could save enough with a conventional loan to offset its higher closing costs, you’ll need to get a few Loan Estimates from lenders.
VA IRRRL: Beyond the closing costs
If you’re still not sure whether a VA IRRRL (streamline) refinance would be good for you, you may be interested in these extra benefits:
- You can finance energy-efficient improvements into your loan amount: If homeowners make upgrades that fall within the requirements of the program, you can add up to $6,000 of those improvement costs into your new mortgage.
- You can stretch out your loan term: If you’re in need of cash flow, the IRRRL can stretch out your loan term by up to 10 years. Doing this will likely increase the amount of interest you’ll pay long term, but it can also ease pressure within your monthly budget by lowering your monthly payments.
- You can pay a lower VA funding fee: The IRRRL funding fee is 0.5 percent of the loan amount, making it much less costly than the typical 2.3 percent that first-time VA home loan recipients and cash-out refinancers must pay (view current funding fee charts here).
- You can avoid credit blemishes: You don’t have to have stellar credit to qualify for the VA streamline program. In general, as long as your current mortgage is in good standing, meaning no more than one late payment in a 12-month period, then you should be able to transition from your existing VA loan to the new loan seamlessly.
- You can roll in closing costs: You may hear advertisements for “no closing costs” loan programs, but what that really means is that the charges that you are responsible for do not have to be paid upfront. Borrowers can choose to add them onto the loan so they don’t have any exorbitant out-of-pocket expenses on closing day. Another option is that the lender could pay the costs, but that will likely mean you’ll get a slightly higher interest rate on the loan.
In short, VA streamline refinancing is ideal for people who are currently paying off their VA mortgage and want to take advantage of lower interest rates. Over time, a lower rate can save you thousands in interest while also lowering your monthly mortgage payment.
With the added bonus of lower closing costs, the IRRRL is definitely a refinance option worth exploring.
VA IRRRL closing cost FAQs
Want to know more about the IRRRL program? Check out these FAQs:
Can closing costs be rolled into a VA IRRRL?
Yes, you can finance your IRRRL’s closing costs into your new loan amount. However, this loan limits financing the cost of discount points into your loan amount. You can roll in the cost of up to 2 points.
Can you finance closing costs on a VA IRRRL?
Yes, you can add the VA IRRRL’s closing costs into your new refinanced mortgage amount. Of course, this means you’d be paying interest on the closing costs for the life of your loan. Make sure you’re saving enough with your new loan to pay for your closing costs.
Do you pay closing costs on a VA IRRRL?
Yes, the VA IRRRL, also known as the VA streamline refinance, requires closing costs. For most VA homeowners, closing costs for an IRRRL come in lower than costs for any other kind of refinance loan.
How much does a VA IRRRL loan cost on closing?
Closing costs vary by loan size, lender, and borrower. On average, closing costs are at least 2 percent of the loan amount and can reach as high as 5 percent if you choose to buy multiple discount points. For a $200,000 loan balance, costs could range from $4,000 to $10,000.
What are closing costs on a VA IRRRL mortgage?
Closing costs pay for services you’ll need to finalize your new mortgage loan. They cover the lender’s administrative fees, the VA funding fee, legal fees, and often prepaid property taxes and homeowners insurance premiums. They can also include discount points that buy down your mortgage rate.
What fees are associated with a VA IRRRL?
The VA allows private lenders to charge IRRRL borrowers up to 1 percent of the new loan’s amount to cover lender’s fees. Most lenders will call this your loan origination fee. You’ll also pay the VA funding fee which is only 0.5 percent of the loan amount for an IRRRL.
How much are closing costs for a VA refinance?
Closing costs for a VA streamline (IRRRL) are almost always lower than costs on a VA cash-out refinance or conventional refi. IRRRL costs are lower for a variety of reasons:
- The IRRRL doesn’t require a credit check or home appraisal
- The VA discounts its funding fee to 0.5 percent for an IRRRL
- Underwriting is simpler because lenders don’t have to verify income
For a VA cash-out refi or a conventional refinance, you’ll have to complete the lender’s full underwriting process which adds more closing costs. You’d also need a home appraisal to verify your home’s market value.
Do you have to pay closing costs if you refinance a VA loan?
Yes, VA loans require closing costs just like any other kind of mortgage loan. But the VA limits closing costs, and most can be financed into the new loan amount if necessary.
How many times can you use the VA IRRRL?
The VA doesn’t limit the number of times you can refinance with the IRRRL as long as you wait at least six months between loans and can gain from the new loan. But you don’t want to refinance too often since each refinance adds closing costs. Refinancing can also cost you more long-term if you stretch out the loan term.
How long does an IRRRL take?
Since it’s a streamline refinance, the IRRRL moves quickly. You could complete the entire process in about a month.
Can you get cash out on a VA IRRRL?
As its name indicates, the IRRRL (interest rate reduction refinancing loan) is not designed to cash out home equity. But there is one exception: cashing out up to $6,000 to pay for energy efficient home improvements. If you need more cash back for another purpose — and you have the equity to back it — check out the VA cash-out refi.
Who qualifies for a VA IRRRL?
Only existing VA loan holders with up-to-date payments on their loans can use the IRRRL program. VA homeowners also have to wait at least six months and show “net tangible benefit.” This means the new loan must be better than your existing loan in some way. Benefits can include a lower monthly payment, a lower interest rate, or switching from an adjustable-rate mortgage to a fixed-rate loan.
Can you remove a spouse with the VA IRRRL?
Yes, you can remove your deceased or divorced spouse from your mortgage loan using the IRRRL program. You can also remove a non-spouse co-borrower such as a roommate or friend. Unless deceased, the veteran who qualifies for the VA loan program must remain as a borrower on the loan.
What documentation is needed for the VA IRRRL?
The IRRRL is a “low-doc” loan which means you’ll need less documentation than a traditional refinance. (No income verification is required, for example.) But you’ll still have plenty of VA forms and worksheets to fill out. Your loan officer can help guide you through the process. You may also need to prove you’re using your home as a primary residence.
Does the IRRRL require a funding fee?
Yes, the IRRRL requires a VA funding fee but it’s only a fraction of the fee for home purchase loans or for the VA cash-out refinance. The funding fee for the IRRRL is 0.5 percent of the loan amount.
Can I finance my VA funding fee?
Yes, you can finance the VA funding fee into the new loan’s amount using the VA streamline refinance. Most borrowers do.
Can I use an IRRRL for an investment property?
No. The Department of Veterans Affairs insures loans only for primary residences. As a result, the VA won’t approve an IRRRL for a rental home or vacation home.
Check your VA mortgage rates. Start here (Mar 23rd, 2023)