What is IRRRL (Interest Rate Reduction Refinance Loan)?
Active or retired members of the armed forces have plenty of financing options to choose from when buying a house. In particular, VA loans offer several appealing incentives like 0% down payment options and extremely competitive interest rates.
But those financing perks aren’t limited to only folks who are looking to move into a new home. Qualified service members may be able to take advantage of favorable refinancing terms, like a lower interest rate, through a VA Interest Rate Reduction Refinance Loan (IRRRL).
We’ll walk you through everything you need to know about a VA IRRRL: What it is, how it works and why you may want to apply for one.
VA IRRRL definition
A VA Interest Rate Reduction Refinance Loan — or IRRRL, if you’re not a fan of tongue twisters — is a refinance program exclusively supporting existing VA loans. As a quick refresher, VA loans are mortgages extended through the Department of Veterans Affairs to eligible service members and military families.
The main appeal of an Interest Rate Reduction Refinance Loan is right there in its name: reduced interest rates. While VA loans often offer lower mortgage rates compared with conventional mortgages, refinancing with an IRRRL (pronounced “Earl”) could reduce interest rates even more. Lenders may also refer to a VA IRRRL as a “VA streamline refinance” because there are fewer steps in the mortgage process.
How does VA IRRRL work?
Often, the main goal for borrowers who refinance with a VA IRRRL is to lower mortgage rates. That’s assuming VA loan rates have dropped in the years since the original mortgage was approved. In some cases, service members may use the VA IRRRL program to refinance to a different type of home loan. For instance, going from an adjustable rate mortgage to 30-year fixed rate mortgage, or vice versa.
The actual VA IRRRL process is similar to any refinance, but remember it exclusively applies to VA loans and, as such, needs to adhere to the same guidelines. As you’ve probably realized, you’ll need to already have an active VA loan to qualify for a streamline loan. You can’t refinance a mortgage that doesn’t exist, after all.
One big way in which VA IRRRL differs from the typical mortgage process is how loan applications are reviewed. The VA will check that the new loan will provide enough benefits to the borrower to warrant a refinance. That means looking at the wider financial implications beyond, say, a lower interest rate.
For instance, funding fees may offset any potential interest savings. In other cases, the borrower may be far enough along in the life of the original loan that refinancing into a 30-year fixed rate VA mortgage with a lower interest rate would wind up costing more in the long run. The good news is the VA is on the lookout for these kinds of situations and will ensure that any streamline refinance is suitably beneficial for the borrower before giving it the green light.
Also, keep in mind that the VA does not extend loans itself — only VA-approved lenders can refinance your mortgage with a VA IRRRL. So, whether you choose to stay with your current lender or explore other options, you need to refinance through a VA-approved lender. Remember, VA IRRRLs are VA loans at the end of the day, so all the same eligibility requirements apply.
What are the current VA IRRRL rates?
VA IRRRL rates are the same as normal VA loan rates, so be sure to check the latest updates to see how VA loan financing terms have changed recently. You’ll want to look at the fineprint to see how those VA streamline refinance rates are calculated. Because so much criteria goes into individual VA mortgage rates — like your credit score, property location and property type — lenders have to make certain assumptions about a borrower’s qualifications when publishing rates.
Remember: VA loan rates fluctuate daily, so you should check back in with your lender on a regular basis to see if rates have dipped or gone up. That being said, interest rates across the lending industry are generally lower than they were just a couple of years ago. So, depending on when you took out your original VA loan or previously refinanced your mortgage, you may be able to lower your interest rate with a streamline mortgage.*
Who qualifies for a VA IRRRL?
VA IRRRL qualifications closely mirror VA loan requirements since, again, a VA streamline mortgage is a refinanced VA mortgage. If you’re interested in exploring a streamline refinance, check that you meet these VA IRRRL eligibility guidelines first:
- You are an active or retired member of the armed forces.
- You currently have a VA loan.
- Your VA loan covers your primary residence.
- Your current interest rate is higher than VA IRRRL rates today.
Are there closing costs with a VA IRRRL?
As with any VA loan, borrowers will need to pay some closing costs to finalize the refinance. In this case, the biggest closing cost you should anticipate is the VA funding fee. This one-time payment goes directly to the VA so the government can continue supporting service members and their families through the VA mortgage program.
VA funding fees are usually lower for first-time program users. Because anyone applying for a VA IRRRL is not using a VA-backed loan for the first time, you should expect to pay a bit more for the closing cost. As of 2021, the most you might pay for a VA funding fee is 3.6% of the loan amount.
A silver lining to consider is that you don’t necessarily need to pay the funding fee all at once at closing. You have the option to bundle that closing cost into your monthly payments and pay it off little by little over the life of your loan.
Is a VA IRRRL loan worth it?
If mortgage rates have dropped significantly since you took out a VA loan, then it may make sense to look into a streamline refinance to take advantage of current VA IRRRL interest rates. Consider these main benefits of a VA IRRRL before making a decision:
- Lower interest rate: By design, a VA IRRRL should reduce your mortgage rate. In fact, the VA will not approve this type of refinance unless the new loan has a significantly lower rate and will benefit you as the borrower.
- Lower mortgage payments: A reduced rate means you’ll wind up paying less interest on your VA loan each month. You’ll also pay less interest over the course of the entire loan.
- Faster, seamless mortgage process: The VA does not require a home appraisal, credit inquiry or income assessment when processing an IRRRL, which removes a few time-consuming steps from the refinance workflow.
- Less time to close: While traditional mortgages and VA loans are subject to an often lengthy underwriting process, streamline refinances typically take less time to close. Again, that’s because the VA does include credit or income underwriting as a necessary step to approve an IRRRL.
- Flexible lending requirements: Like any VA loan, borrowers do not need to meet minimum credit score requirements to become eligible. That’s one less potential roadblock to refinance approval to worry about.
Although the VA may not have specific eligibility requirements in place, your lender could be another story. When shopping for VA refinance rates, be sure to check what qualifications you may need to meet to have your VA IRRRL approved by different lenders.
A VA IRRRL may seem like just another mortgage lending acronym, but it could help you cut back on the amount of interest you pay each month. That’s not all: The VA also has pretty flexible application requirements for streamline mortgages, so you may not need to go through a rigorous underwriting process to close this type of loan.
Keep in mind that a VA IRRRL is only available to people who already have a VA loan in place, and the VA won’t sign off on your application unless you clearly stand to benefit from refinancing your mortgage.
If you’re interested in a streamline refinance, your first order of business should be to compare current interest rates with your existing VA loan terms. Then, once you’ve confirmed how refinancing may impact your mortgage payment, reach out to an expert loan officer for help getting the best VA IRRRL rates possible.
*Savings, if any, vary based on consumer’s credit profile, interest rate availability, and other factors. Contact Guaranteed Rate, Inc. for current rates. Restrictions apply.
Guaranteed Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency.