What Is an Interest Rate Reduction Refinancing Loan – IRRRL?

filling out paperwork for an interest rate reduction refinancing loan
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The Interest Rate Reduction Refinancing Loan (IRRRL) offers current Veterans Affairs mortgage holders an excellent opportunity to take advantage of low-interest rates. To be eligible, the IRRRL must be used to refinance a property that already has an eligible VA loan, but before you call your lender, there are a few things you need to know. The keys to an IRRRL loan are:

Lower Interest Rate and Better Term

The new interest rate must be lower than your existing rate. To make it worthwhile, your new interest rate should be at least one percentage point lower than your existing rate.

Terms: Besides lowering your interest rate, you may be able to change the term of your loan. For example, you may want to go from a 30-year loan to a 15-year loan. While this will save you a lot of interest over the life of the loan, the downside is that your monthly payment will be significantly higher than it was.

Under the IRRRL program, you can't receive cash proceeds from the refinance. It means that if your existing mortgage is $90,000, you won't be allowed to borrow an additional $20,000 against the equity of your home for a remodeling project. There is, however, one small exception: You can add up to $6,000 for energy efficiency improvements. Further, you can't combine your existing mortgage and a second mortgage under the IRRRL program.

The chart below shows the impact that just 1% can make on your mortgage rate.

Credit Checks, Appraisals, and Certificate of Eligibility

You do not need to reapply for a Certificate of Eligibility (CoE). The lender will be able to receive a confirmation from the VA electronically. The VA doesn't require an appraisal or credit check. However, your lender might require one or both of these documents. If your current mortgage is an FHA or conventional loan (in other words, it's not a VA loan), you won't be able to refinance through the IRRRL program. You also won't need to pay any upfront fees. All refinancing costs (fees, etc.) can be built into the loan.

Choosing a Lender

Contrary to popular belief, you don't need to refinance with the lender that holds your existing mortgage. Any lender can provide you with an IRRRL. However, it's always a good idea to check with your current lender. If you take your loan elsewhere, your current lender will lose whatever profits they were making on your loan. They may be inclined to give you a better deal to keep your business.

It's recommended that you check with at least three lenders before you get your IRRRL underway. Fees, terms, and costs can vary widely. Unfortunately, some unscrupulous lenders prey upon veterans. According to the VA, "Some lenders may say that VA requires certain closing costs to be charged and included in the loan. The only cost required by VA is a funding fee of one-half of one percent of the loan amount which may be paid in cash or included in the loan."

Refinancing isn't the best solution for everyone. However, for homeowners who want to lower their mortgage payments, especially if their current interest rate is at least one percentage point above the going rate, it may be an option worth looking into.