Breaking down the basics
Streamline Refinancing Your VA Loan
Note that you can use any VA approved lender to refinance
If you have a VA loan and are thinking about refinancing, you have options
Refinancing Without Cashing Out
VA loans have a unique feature that allows borrowers to quickly and efficiently refinance their loans in order to take advantage of reduced interest rates. These are referred to as “Interest Rate Reduction Refinance Loans” or IRRRLs (pronounced “earls”). They are also known as “Streamline Refinancing” loans. The obvious purpose of a Streamline Refinancing is to obtain a lower interest rate and thereby reduce your monthly payments. These loans can only be used to refinance an existing VA home loan. You cannot refinance a conventional mortgage with a Streamline Refinancing.
Streamlining is Easier…
The process of getting a Streamline Refinancing is much simpler than a new home purchase mortgage, primarily because fewer documents are required (no COE, pay stubs, Forms w-2, tax transcripts, etc), and there is no credit review or approval needed. Also, you don’t need a new appraisal of your home; consequently, there are no “loan to value” limits as there are with a new home purchase loan. You can even refinance if the value of your home has dropped below the current amount of your loan. (If you bought a home at a high price in 2006, for example, this could be you.)
Unlike a VA home purchase mortgage, Streamline Refinance rules do not require that you live in the home; rather, you must only certify that you previously occupied it.
…and Less Expensive
In most cases, the VA funding fee on a Streamline Refinancing is 0.5% of the loan amount – much less than a VA home purchase loan. You may also be exempt from paying this fee if you meet certain requirements. You also don’t have to pay transfer taxes.
Closing costs for Streamline Refinance loans are generally similar to closing costs on VA home purchase loans. Typically, this would be about 1.0% to 3.0% of the total loan amount. Per VA rules, total lender fees may not exceed 1.0% of the loan amount.
There are also “Discount Points,” which is an optional payment to the lender to lower the interest rate on your loan. I don’t recommend buying points unless you are confident that you will stay in your home long enough to cover the cost. Either way, most if not all closing costs can be wrapped into the new loan, which means little to no out-of-pocket expenses. Note that only two discount points can be included in the loan amount. Any additional points must be paid by you at closing.
Closing costs for Streamline Refinance loans
Should You “Reset the Clock”?
When you refinance your VA loan, you have the option of “resetting the clock” by getting a new mortgage loan with a 30-year term. This, along with a reduced interest rate, can help lower your monthly payment. However, this also means extending the time it takes to pay off your loan.
For example, if you took out a 30-year mortgage five years ago, you have 25 years remaining until your loan is fully repaid. When you refinance, you can maintain your “payoff timetable” by getting a new 25-year loan instead of another 30-year loan. However, your maximum term increase is 10 years, so if you have only 10 years remaining on your current loan, your new term cannot exceed 20 years. Of course, you can also select a 15 or 20-year loan if you want to accelerate your repayment schedule.
Cost Saving Requirements
You cannot do a Streamline Refinancing unless you will recover all costs associated with the new loan (excluding the VA funding fee) within 36 months of closing; this includes the cost of discount points. Also, your new interest rate must be at least 0.5% less than your current rate if you are refinancing a fixed rate loan with a new fixed rate loan. If you are switching from a fixed to an adjustable rate loan, your new interest rate must be at least 2.0% less than the rate on your current loan, and if you’re switching from an adjustable to a fixed rate loan, no decrease in interest rate is required.
Other Closing Costs
Closing costs payable to third parties (in addition to the Funding Fee and lender fees) normally associated with a Streamline Refinancing loan may include, among other things:
• Title Examination and Title Insurance
• Flood Zone Determination
• Recording Fees
• Attorney fees
You Must Be Up to Date
You cannot qualify for a Streamline Refinance loan if you have been late with any mortgage payments over the past year. If you have been late with a payment, don’t apply to refinance until you have made 12 on-time payments in a row. You also must stay current with payments while your loan application is being processed
There are “Seasoning Requirements” for all VA Streamline Refinancing’s: you cannot refinance until you have made at least six payments on your current VA mortgage loan. Also, the due date of your first payment on your new loan must be at least 210 days after your first payment due date on your first loan.
Other Useful Information
While you can’t get cash back on a Streamline refinancing, there is one exception: you can take out up to $6,000 in cash, but only for specific, energy efficient home improvements made within 90 days prior to loan closing date. In other words you have to pay for the improvements first, and then add the funds to your new loan balance. This may be helpful if you want to install new windows or get a new heat pump, for example.
There is no maximum loan amount on a Streamline Refinance loan. You can refinance your existing loan balance along with permitted costs and fees (including the funding fee). You can also finance up to two discount points. Ask your loan officer to help you decide if buying down your rate using discount points is a good idea for your situation.
This is only a summary of VA Streamline Loan information – for complete details visit: https://www.va.gov/housing-assistance/home-loans/loan-types/interest-rate-reduction-loan