If you have a VA loan, you are lucky enough to be able to refinance it with little verification required. The VA relies on the fact that you have paid your mortgage payments on time and that you benefit from the refinance. That’s all that you need to refinance!
But then comes the bad news. You have to pay closing costs. This includes the VA funding fee. Luckily, this time around, the funding fee isn’t as much as it was when you bought the home. You only have to pay 0.5% of your loan amount this time. But that’s still a decent amount of cash you must come up with to close the loan.
Are you able to wrap it into your IRRRL loan?
The VA’s Stand on Rolling the Funding Fee Into Your Loan
There is good news – you can roll your VA funding fee into your loan. You can even roll your closing costs into your loan amount if you need to do so. These are the only items that the VA allows you to add to your loan amount though.
The VA IRRRL loan is not a cash-back loan. You cannot personally receive any cash in hand when you refinance. The program is strictly to help you lower your mortgage payment, interest rate, or change your term. Any money that you add to the loan amount can only be for the purpose of paying the closing costs on the loan.
Does it Make Sense to Include the VA Funding Fee?
Now you should ask yourself, does it make sense to take a higher loan amount to include the funding fee? In some cases, it does make perfect sense, but you have to do the math.
First, figure out how much your mortgage payment would change if you increased the loan amount. Ask your lender for a quote with you paying the closing costs yourself as well as wrapping them into the loan. This way you can see the difference in the mortgage payments.
We don’t want you to focus only on that difference, though. Chances are it will only cost you another $15-$50 per month depending on your interest rate and the amount of the closing costs. Where we want you to focus is on the big picture. Ask yourself if you are going to stay in this home for the long-term. If you are, you may want to avoid rolling the VA funding fee or any other closing costs into your loan. If you do, you’ll pay interest on that amount you borrowed for the entire term – up to 30 years. That extra $20 a month just became $7,200. That’s kind of sobering.
Now if you know that you will move in the future – say five to ten years, it may make sense to do so. You have to do the math. Figure out how much your mortgage payment would increase and how long you will be in the home. If you will move before you would pay off the closing costs by borrowing the funds, then you make out on the deal. If you will be in the home longer than it would take to pay off the closing costs, though, you will pay more for the closing costs and funding fee in the end.
It’s a fine line that you cross when you decide to roll the VA funding fee into your loan amount. Yes, you can do it, but you should really think about whether it makes sense. Go over the numbers with your lender to determine which way makes more sense for you. Of course, if you don’t have the cash to pay the funding fee and other closing costs, you might be left with no choice but to roll the costs into your loan.