What Is an IRRRL, Interest Rate Reduction Refinance Loan?

Want a lower mortgage rate? If you have a VA loan, an IRRRL could help

Mother watching over two daughters hugging their dad in military fatigues uniform in the front yard of their house.
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If you’re a homeowning veteran, active-duty service or qualifying reserve member, or a surviving military spouse looking to lower your mortgage loan’s interest rate, you may qualify for an interest rate reduction refinance loan (IRRRL).

Only available to homeowners with existing Veterans Administration (VA) loans, this streamlined refinancing program allows you to replace your current mortgage with a new mortgage with a lower rate, or move from an adjustable-rate mortgage to a fixed-rate mortgage.

Pros and Cons of IRRRL Loans

Pros

  • Closing costs and funding fee can be rolled in

  • No requirements for credit information, underwriting, income, or LTV in most cases

  • Designed to reduce your interest rate and monthly payment

Cons

  • Only available if you already have a VA loan

  • Only available through certain lenders

  • No cash-out options available, overall

Pros and Cons of IRRRLs

There are countless benefits to IRRRLs, as well as to VA loans in general. They come with very few qualifying requirements and upfront costs. You can also finance up to 2 discount points to lower your interest rate even more. 

The downside to IRRRLs is that they’re only available to current VA loan holders and through certain approved lenders. There are also no cash-out options available, in most cases, unless you're planning energy efficiency upgrades. If you want to refinance for a larger loan that includes funds to make home improvements or cover other expenses, you might need to use a VA-backed cash-out refinance loan instead.

How Does an IRRRL Work?

An IRRRL works similarly to a traditional refinance loan in that it replaces your existing mortgage with a new one. IRRRL loans can be fixed, adjustable-rate, or hybrid adjustable-rate, where interest rates are concerned.

However, there are a few things that differ with an IRRRL, including:

  • In many cases, your IRRRL interest rate must be lower than the original loan's rate.
  • Most of the time, the IRRRL principal and interest payment must be lower than the loan being refinanced.
  • Credit information or underwriting are rarely required by the VA (although lenders may have their own requirements).
  • No cash-out options are available unless you're planning to use the funds for energy-efficiency improvements

Like other VA mortgage loans, IRRRLs are only available through VA-approved lenders.

The IRRRL's principal and interest payment must be lower than the original loan, unless the IRRRL is refinancing an ARM, the refinance term is shorter than the original loan (30 years to 15 years, for example), or the IRRRL includes energy-efficiency improvements.

Eligibility for IRRRLs

The first requirement for an IRRRL is that you have a current VA-backed mortgage loan. IRRRLs are only available on VA-to-VA refinances, so if you don’t currently have a VA mortgage, you won’t be eligible, no matter what your service record is.

Generally, the new loan must be for the same individual or individuals on the original loan and must include the veteran. In addition, you must be living in the house or have previously lived in the house.

As with all VA home loans, you’ll also need a valid Certificate of Eligibility (COE). You can obtain this through the VA/DoD eBenefits portal, or use your previous COE, if still available. Your lender can also use the VA’s email confirmation process to verify your previous COE. As well, you'll need to certify that the veteran currently lives in or has occupied the property.

Usually, there aren't income limits, LTV limits, or credit requirements for an IRRRL mortgage. While some lenders may have their own credit or underwriting requirements, the VA doesn't require credit or underwriting unless the loan is 30 days or more past due, or the monthly payment will increase 20% or more. Borrowers with recent Chapter 13 bankruptcies may also have additional obligations.

As with other types of VA-backed loans, there is a VA Funding Fee, which is 0.5% for IRRRL loans.

Though there are no hard-and-fast limits to VA loans or IRRRLs, most VA lenders will only lend up to four times a veteran or service member’s current entitlement. Your new loan also cannot exceed the balance of your existing loan (plus any financed fees and closing costs).

Applying for an IRRRL

To apply for an IRRRL, you’ll need to first find a VA lender that offers one. Then, you’ll fill out the application and provide your COE and any other information the lender requires. 

You'll also need to decide if you will pay upfront any closing costs including discount points and the funding fee, or if you’ll include them as part of your loan balance. In some cases, you may be exempt from this funding fee altogether (if you’re receiving service-connected disability compensation, for example).

The Bottom Line

Because the IRRRL process is fairly straightforward, these loans are often a quick and hassle-free route to refinancing—as long as you’re eligible. Be sure to get quotes from at least a few lenders, as rates and terms can differ from one to the next and can help you negotiate interest rate offers, which may lower your interest rate even further.

Article Sources

  1. U.S. Department of Veterans Affairs. "Interest Rate Reduction Refinance Loan." Accessed April 11, 2020.

  2. Benefits.gov. "Interest Rate Reduction Refinance Loan." Accessed April 11, 2020.

  3. Department of Veterans Affairs. "VA Pamphlet 26-7, Revised. Chapter 6: Refinancing Loans," p. 10. Accessed April 15, 2020.

  4. U.S. Department of Veterans Affairs. "VA Funding Fee and Loan Closing Costs." Accessed April 11, 2020.