VA Streamline Refinance: A Quick Way To Get A Better Rate

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Amy Fontinelle,

Amy FontinellePersonal Finance Expert

Mike Cetera

Mike CeteraEditor in Chief, Forbes Marketplace U.S.

Personal Finance Expert, Editor in Chief, Forbes Marketplace U.S.

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Rachel WitkowskiCorrespondent/Editor

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Updated: Dec 22, 2020, 9:24pm

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VA Streamline Refinance: A Quick Way To Get A Better Rate

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A VA streamline refinance might be the easiest way to lower your interest rate when you have a VA mortgage. This type of refinance usually does not require an appraisal, a credit check or underwriting—three things that normally cost borrowers money and time.

VA streamline refinance rates are competitive with conventional loan refinance rates, too. While they do have some restrictions, such as not allowing homeowners to touch their equity, they’re meant to help qualifying military service members enjoy affordable, stable home ownership.

What Is a VA Interest Rate Reduction Refinance Loan (VA IRRRL)?

A Veterans Administration interest rate reduction refinance loan (VA IRRRL) is a home loan that replaces your existing VA mortgage with a new loan that has more favorable terms. You also will see this type of mortgage referred to as a VA streamline refinance.

There are several ways the new loan could be more favorable:

It could give you a lower monthly payment by lowering your interest rate.
It could give you a more stable monthly payment by getting you out of an adjustable-rate mortgage (ARM) and into a fixed-rate mortgage.
It could have a lower interest rate and a shorter term, allowing you to get out of debt sooner and save money on interest over the long run.

If the new loan has a longer term, however, the new term can’t be longer than 30 years plus 32 days, or 10 years longer than the term of your original loan, whichever is shorter. In other words, if the loan you are refinancing is a 15-year loan, you cannot refinance into a 30-year loan—but you can refinance into a 25-year loan.

Does the VA allow homeowners to refinance into an ARM with an IRRRL? Yes. But the new mortgage must have a lower interest rate than your current mortgage does.

You can even use an IRRRL to get out of a loan you’ve fallen behind on. The VA does not require you to be current on your loan to be eligible for a streamline refinance. Some lenders do, however, so if you’re in this situation, you may have to shop around more to get approved.

And while you can roll your late fees and missed payments into the new loan so you can get a fresh start, you may not get approved for a new loan if your finances don’t support the ability to pay it. The VA’s IRRRL program is meant to put borrowers in a better financial situation, not an unsustainable one.

How a VA Streamline Refinance Works

To get a VA streamline refinance, you’ll need to apply with a lender that offers this type of mortgage. Working with a VA loan specialist can make the process easier because they are experts in VA loans, which are different in many ways from conventional loans. The Veterans Administration itself is not a lender.

As with any refinance, applying for a home loan with at least three lenders is a smart practice. The interest rate and fees you’ll pay on an IRRRL, even though it’s a government-guaranteed loan, will vary by lender. You’ll also want to calculate the break-even period to see when you’ll start coming out ahead due to the better terms of your new loan—and after paying closing costs to refinance. It’s a simple calculation:

Closing costs / monthly savings = number of months to break even

Per the VA, your break-even period should be less than or equal to 36 months (three years). Your lender is required to show you a written comparison of your old loan, new loan and break-even period.

If you’ve found your forever home and you’re planning for this to be the last mortgage you ever get, getting the best interest rate will be paramount.

If you think you might be getting permanent change of station (PCS) orders in two years, you’ll want to minimize how much money comes out of your bank account at closing:

One way to do this is to roll your closing costs into your new loan (that is, finance your closing costs).
Another way is to ask the lender to pay your closing costs in exchange for a higher interest rate.

A mortgage with a higher APR may be a better option. See which choice will save you the most money.

The VA says it’s OK if your IRRRL results in a higher monthly payment due to financed closing costs, a shorter loan term or a move from an ARM to a fixed-rate loan. However, if your monthly payment will increase by 20% or more, you will have to demonstrate to the lender that you have enough stable and reliable income to make the higher payment. In other words, you’ll have to qualify for the loan.

VA IRRRL Qualifications

Here are the two key qualifications to be eligible for a VA streamline refinance:

The loan you want to refinance must be a VA loan.
The home you want to refinance must be your current or former primary residence.

You’ll also need your Certificate of Eligibility, which your lender can obtain electronically from the VA if you don’t have it already.

The new loan also must meet interest-rate reduction guidelines:

When you’re moving from one fixed-rate loan to another, the new loan’s interest rate must be at least half a percentage point lower.
When you’re moving from a fixed-rate loan to an adjustable-rate loan, the new loan’s interest rate must be at least two percentage points lower.

You also can’t do an IRRRL unless it’s been at least 210 days since you closed on your current VA loan and you have made six consecutive monthly payments. If you’ve skipped payments under a forbearance plan, those months do not count toward your six consecutive monthly payments.

Like an FHA streamline refinance, the VA doesn’t require a credit check or underwriting approval for an IRRRL. That’s good news not only if you want to save time, but also if your credit score or income have decreased.

Can You Take Cash Out with a VA IRRRL Refinance?

You cannot cash out any of your home equity with a VA IRRRL refinance. The VA feels so strongly about this rule that it requires the lender to round down your loan amount if necessary to avoid giving you more than $500 at closing.

The only exception to this rule is that you can receive up to $6,000 to reimburse you for energy efficient home improvements you completed within 90 days before closing.

Similarly, if you have a second mortgage, such as a home equity loan or line of credit, you cannot use your new VA loan to pay it off.

If you want cash back, you can do a VA cash-out refinancing loan, which does require credit qualification and underwritin g and requires you to live in the home as your primary residence.

To sum up, let’s review the VA streamline refinance pros and cons we’ve laid out in this article.

VA IRRRL Benefits

Lower your interest rate or get a fixed monthly payment
Roll your funding fee, closing costs and up to two discount points into the new loan
Pay a funding fee of just 0.5% of the loan amount
Avoid paying for an appraisal (usually not required)
Skip the credit check (usually not required)
Avoid loan underwriting (usually not required)
Refinance even if your loan is past due (credit check will be required)
Refinance even if the home is no longer your primary residence
Finance up to $6,000 in home energy efficiency improvements