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Comparing VA Loan Refinancing Options

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Hi Phil and Ryan,

I'm a veteran considering refinancing my VA loan and I've come across various options like the Interest Rate Reduction Refinancing Loan (IRRRL) and Cash-Out Refinance.

I'm unsure about the differences, the requirements for each, how my entitlement is affected, and what benefits I might gain.

Can you guide me through the process of choosing the right refinancing option, what to expect in terms of appraisal, cash back, fees, guaranty, interest rates, and any benefits such as reducing my monthly payments or tapping into my home equity?

Also, are there specific disclosures I need to be aware of during the application and closing?

James L.

Expert Answer: Hi James, let's help you find the perfect VA loan refinancing option.

Differences Between IRRRL and Cash-Out Refinance

The Interest Rate Reduction Refinancing Loan (IRRRL) and Cash-Out Refinance serve two distinct purposes within the VA loan program.

The IRRRL is specifically designed to lower the interest rate on an existing VA loan, offering a streamlined process that typically doesn't require an appraisal or extensive underwriting.

Its primary goal is to reduce monthly payments or make the loan terms more favorable for the borrower, without providing any cash back, except for specific cases like energy efficiency improvements.

In contrast, a Cash-Out Refinance allows veterans to convert home equity into cash, which they can use for any purpose such as debt consolidation, home improvements, or personal expenses.

This option is not limited to VA loans; borrowers with non-VA loans can also use this method to refinance into a VA loan, potentially benefiting from VA loan terms.

Unlike the IRRRL, the Cash-Out Refinance requires a full underwriting process, including income verification, credit check, and home appraisal, reflecting its broader financial implications and opportunities.

A military person contemplating VA loan refinancing options

Eligibility Requirements for IRRRL vs. Cash-Out Refinance

Eligibility requirements for an Interest Rate Reduction Refinancing Loan (IRRRL) and a Cash-Out Refinance differ, reflecting the distinct purposes of each refinancing option.

For an IRRRL

  • You must already have a VA-backed loan. The IRRRL is specifically designed to refinance existing VA loans.

  • The purpose of the IRRRL must be to reduce your mortgage interest rate or convert an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Essentially, it should offer a financial benefit in terms of lower monthly payments or more stable loan terms.

  • There is no requirement for a new appraisal, income verification, or credit underwriting package, making the process quicker and less cumbersome.

  • You must be current on your mortgage with no more than one 30-day late payment within the past year, and you must certify that you have previously occupied the property.

For a Cash-Out Refinance

  • Veterans, active-duty service members, and select reservists or National Guard members are typically eligible, similar to other VA loans. Surviving spouses may also be eligible under certain conditions.

  • You can refinance any existing mortgage into a VA loan with a Cash-Out Refinance, whether it's a VA loan or not. This option allows you to tap into your home equity and use the funds for various purposes.

  • A new credit check and appraisal of your home are required to determine the current value and your eligibility.

  • You must meet VA and lender-specific income and credit requirements, demonstrating the ability to repay the new loan.

For both types of refinancing, you need sufficient entitlement.

While the IRRRL lets you reuse your VA loan entitlement without further impact, a Cash-Out Refinance requires you to have enough entitlement available to cover the new loan.

Impact on VA Loan Entitlement

The Interest Rate Reduction Refinancing Loan (IRRRL) affects your VA loan entitlement minimally because it simply lowers the interest rate on your existing VA loan, using the same entitlement.

No additional entitlement is required, and the process doesn’t alter the amount of entitlement you have in use.

A Cash-Out Refinance, however, can significantly impact your VA loan entitlement. This option allows for the refinancing of any mortgage into a VA loan and may involve accessing home equity, which uses additional entitlement or the same entitlement differently.

If converting a non-VA loan to a VA loan or taking out cash, you're likely to use more entitlement. This could affect your future VA loan usage until the entitlement is restored upon paying off the VA loan.

In essence, an IRRRL is entitlement-neutral, while a Cash-Out Refinance can reduce available entitlement for future VA loans.

Benefits of Choosing an IRRRL

Choosing an Interest Rate Reduction Refinancing Loan (IRRRL) offers several benefits, making it an attractive option for veterans with existing VA loans under certain circumstances.

The IRRRL is often the best choice when you're looking to lower your monthly mortgage payments without accessing home equity.

Here are the key benefits:

  • Lower Interest Rates: The primary advantage of an IRRRL is to reduce your current mortgage interest rate, which can significantly lower your monthly payment.

  • Streamlined Process: The IRRRL has minimal documentation requirements. There's no need for an appraisal in most cases, nor is there a requirement for income verification, making the refinancing process faster and less intrusive.

  • No Out-of-Pocket Costs: The costs associated with an IRRRL can be rolled into the new loan, meaning you might not need to pay anything upfront.

  • Fixed-Rate Conversion: If you currently have an adjustable-rate mortgage (ARM), an IRRRL can convert it to a fixed-rate mortgage, offering more predictable monthly payments.

Advantages of a Cash-Out Refinance

A Cash-Out Refinance benefits veterans by allowing access to home equity for any purpose, offering the chance to refinance any mortgage into a VA loan with potentially better terms, and enabling adjustments to loan terms to fit new financial goals.

It's a better option than an IRRRL when:

  • You need cash for large expenses or want to consolidate debt.

  • You wish to convert a non-VA loan to a VA loan for better interest rates and terms.

  • You aim to adjust your mortgage term or rate based on current financial needs.

In short, while an IRRRL focuses on lowering payments through reduced interest rates, a Cash-Out Refinance provides liquidity and flexibility for broader financial management.

Cash-Back Options in Refinancing

In a Cash-Out Refinance, you can indeed receive cash back, as this option is specifically designed to allow you to access the equity built up in your home.

You can use this cash for any purpose you choose, such as home improvements, debt consolidation, or other personal expenses.

On the other hand, the Interest Rate Reduction Refinancing Loan (IRRRL) generally does not allow you to receive cash back.

The primary exception is for the inclusion of up to $6,000 for energy efficiency improvements made to your property, where the costs can be rolled into the loan amount and reimbursed to you after the improvements are completed.

In summary, cash back is directly accessible through a Cash-Out Refinance, offering flexibility for various financial needs, while the IRRRL is more restrictive, focusing solely on improving loan terms with limited scope for receiving cash back.

Refinancing Fees Comparison

In refinancing a VA loan, the Interest Rate Reduction Refinancing Loan (IRRRL) usually incurs a VA funding fee of 0.5% and lower closing costs, with options to minimize out-of-pocket expenses by rolling fees into the loan.

A Cash-Out Refinance involves a higher VA funding fee of 2.3% or 3.6% for subsequent uses, with broader closing costs due to the extensive underwriting process, and generally higher upfront costs.

Overall, the IRRRL typically has less fees compared to a Cash-Out Refinance.

Required Disclosures for Refinancing

For an IRRRL, be aware of disclosures highlighting the refinancing benefits and fee recoupment timeline. For a Cash-Out Refinance, expect detailed loan estimates, equity impact disclosures, and specifics on the VA funding fee.

These disclosures ensure transparency about the terms and costs of your refinancing.

Both refinancing options require clear and detailed disclosures to ensure you fully understand the terms, costs, and implications of your new loan before proceeding.

Generally, disclosures are designed to protect you by providing transparency around the refinancing process, fees, and your financial obligations.

Recap: What's Better for You?

Determining which refinancing option suits you best depends on your specific financial situation and goals.

An IRRRL is ideal if you're looking to lower your interest rate and monthly payment without tapping into your home equity, benefiting from a streamlined process with minimal fees.

It's the go-to choice for those satisfied with their current home equity and primarily interested in cost savings.

On the other hand, a Cash-Out Refinance is suited for veterans who need access to cash for purposes like debt consolidation, home improvements, or covering significant expenses.

It's beneficial if you're looking to take advantage of your home's equity or refinance a non-VA loan into a VA loan, despite the potentially higher fees and stricter qualification criteria.

In summary, assess your financial needs, the equity in your home, and your future financial plans to decide.

Whether seeking to reduce your monthly payments or needing cash for large expenses, MakeFloridaYourHome is here to guide you through choosing the right VA refinancing option.

With over 50 years of mortgage industry experience, we are here to help you achieve the American dream of owning a home. We strive to provide the best education before, during, and after you buy a home. Our advice is based on experience with Phil Ganz and Team closing over One billion dollars and helping countless families.

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