When you are ready to refinance your VA loan, you have two options – the VA IRRRL or the VA cash-out refinance. Both loans have flexible underwriting guidelines and the same VA guarantee. How do you know which one is right for you?
Below we discuss the pros and cons of each program.
The Pros of the VA IRRRL
The VA IRRRL is the Interest Rate Reduction Refinance Loan. This streamline refinance program allows veterans to refinance by verifying their mortgage payment history and proving that there is a benefit for the refinance. Below are the pros of this program:
- You don’t need to verify your credit score, debt ratio, income, or home value
- You can secure a lower interest rate with very little verification required
- You can save money each month on your mortgage payment
- The VA limits the amount of closing costs you can pay
- You can roll the closing costs and funding fee into the loan
- You can finance up to $6,000 in energy efficient changes
The Cons of the VA IRRRL
The VA IRRRL is a good loan, but it does have a few downsides that you should be aware of as well:
- If you don’t have a current VA loan you are not eligible, even if you are a veteran
- You have to pay the funding fee again, but this time it’s only 0.5%
- You must show that there is a benefit to refinance and get the lender’s approval
- You start your mortgage term all over again if you keep the same term
The VA IRRRL is a great program for borrowers that will stay in their home for the long-term and want a lower payment. If rates drop, it’s an easy way to get a lower payment without having to go through the full underwriting process.
The Pros of the VA Cash-Out Refinance
The VA cash-out refinance allows you to tap into the equity of your home. This loan requires full verification of all aspects of your qualifying factors including your income, employment, credit score, and home value. The program has flexible guidelines, but you still have to qualify.
The benefits of this program are as follows:
- You don’t need to have a VA loan to qualify; you just have to be a veteran
- You can borrow as much as 100% of the value of your home
- You can use the money as you see fit, whether it’s for home improvements, vacation, college, or something else
- The VA guidelines are flexible
The Cons of the VA Cash-Out Refinance
Even with the flexible guidelines and low costs, the VA cash-out refinance does have its downsides:
- You’ll pay the 2.15% funding fee again
- You must go through the full verification process which takes time and may make it harder to qualify
- You borrow more than you owed before, which means either a higher payment or a longer term
Choosing Between the VA IRRRL and the Cash-Out Refinance
Making the choice between the VA IRRRL and the cash-out refinance depends on your situation. Ask yourself the following questions:
- Do you need to tap into your home’s equity? If so, you need the cash-out loan.
- Are you upside down on your home and want a lower payment? The VA IRRRL program may be better.
- Are you current with your VA payments? A VA streamline loan may be the best choice if you just want a lower payment.
As you can see, the choices depend on your situation. If you need money out of the home’s equity, you have no choice but to choose the cash-out refinance. But, if you don’t tap into the equity, you have a timely mortgage payment history, and you have a current VA loan, you may be a good candidate for the VA IRRRL.