The VA streamline refinance loan, also known as the IRRRL, or Interest Rate Reduction Refinancing Loan, is a great way for veterans to lower their interest rates and monthly payments by refinancing their VA mortgage. Today’s low interest rates make the IRRRL very attractive to homeowners who are veterans.
Because the IRRRL requires no out of pocket expenses for the borrower, all costs can be rolled into the new loan. One cost associated with the IRRRL is the VA refinance funding fee. It’s important to understand the specifics of the funding fee.
The VA refinance funding fee is a fee charged by the VA at the time of the loan. It is the only fee required by the VA, so beware if lenders try to tell you that the VA charges closing costs above and beyond the VA refinance funding fee. It is not true.
The funding fee is 0.5% of the new loan amount. This fee may be paid in cash at closing or it may be rolled into the new loan.
The funding fee is charged in lieu of monthly mortgage insurance. The VA does not require that vets take out private mortgage insurance that would have been the case with a conventional loan. This cost is deferred with the 0.5% funding fee.
Although it is a required cost, vets that are currently receiving disability benefits or are entitled to VA compensation are exempt from the IRRRL funding fee.
It is worth mentioning other fees that may be rolled into your loan. Lending institutions charge closing costs, and it is beneficial to shop around for a lender who will give you the best deal.
If you refinance frequently and roll your funding fee and closing costs into your loan, you may find yourself in a situation in which you owe more than your house is worth. Your payments will also not be reduced as much as you might like. Paying the VA refinance funding fee plus any closing costs up front will maximize the advantage of the VA streamline loan, which is lowering your interest rates and payments.
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