If you are a veteran with a VA home loan, you have the benefit of refinancing with the IRRRL program. The Interest Rate Reduction Refinance Program has one objective – to help make your payment more affordable. The VA doesn’t require lenders to verify any qualifying factors for your loan with the exception of your mortgage payment history. In exchange for this leniency, you can’t use it as a cash-out loan.
There is one exception to this rule though, that can help you make home improvements and still verify very little with the program.
Make Energy Efficient Changes
If you make energy efficient changes to your home immediately prior to refinancing with the VA IRRRL or immediately following it, you may be able to include the costs in your loan. Even though this is technically taking cash out of your home’s equity, it’s a tradeoff for lower utility bills.
The VA won’t allow borrowers to use the VA IRRRL for energy efficient changes unless there is proof of some type of savings. Veterans can borrow up to $6,000 for these changes. If you borrow the maximum amount, you must get an energy audit on the home. This report lets the lender know which changes will have the greatest effect on your energy usage and utility bills. These are the changes the VA will allow in connection with the VA IRRRL.
No Other Cash-Out Opportunities Exist
The energy efficiency changes are literally the only change the VA will allow with the VA IRRRL. Any other money you borrow in conjunction with this loan pertains only to the following:
- Outstanding principal balance of your current VA loan
- Allowed closing costs
- New funding fee
This does mean that your VA IRRRL amount may be slightly higher than your current loan. If you wrap the closing costs into it along with the funding fee, you’ll have a higher loan amount. This could mean a slightly higher payment depending on the terms of the loan. If you kept the same term, you’ll need a lower interest rate in order to prove there is a benefit to the refinance. If you lowered the term or refinanced out of an adjustable rate loan, either of those situations could serve as your net tangible benefit.
Understanding the Implications of Refinancing
It’s important to understand what happens when you refinance your VA loan. Even when it sounds like a great idea because you can get a lower rate or you can pay for energy efficient changes, really evaluate the benefits. If you refinance soon after originally taking out the VA loan, chances are you still owe most of the principal that you borrowed. If you add to that amount the money for energy efficient changes or closing costs, you could be taking out more than your home is worth.
Luckily, the VA doesn’t require lenders to determine the value of the home for a VA IRRRL. But, as the borrower, you should know what you are getting into when you refinance. Being upside down on your loan means that you owe more than the home is worth. It could take quite a while to have any equity in the home. Usually, it only takes a matter of a couple of years to recoup the costs of refinancing, though, allowing you to enjoy the savings once you pay those closing costs off.
Technically, you cannot take cash-out when using the VA IRRRL program. But, if you make energy efficient changes, you do take money out of the home’s equity. You may even go slightly over the home’s value, depending on how much you borrow. Make sure the savings are there for you before you make this decision. Also make sure that you plan to stay in the home for a long enough period for the new costs to make sense before doing it.Click to See the Latest Mortgage Rates»