If you are thinking about refinancing your VA loan with the VA IRRRL, chances are you want a lower interest rate. The VA IRRRL is a rate/term refinance. Veterans use it to either lower their interest rate or change their loan’s term. Either way, you want a great interest rate.
So what determines that interest rate? Keep reading to find out.
Your Risk of Default
As is the case when you bought your home, your lender will need to determine how likely it is that you will default on your loan. The more likely it is that you will default on your mortgage, the more likely it is that a lender will give you a higher interest rate.
Typically, in order to determine your VA IRRRL approval and interest rate, lenders look at your mortgage payment history. This is one of the only factors that the VA requires. Because of this, you need a solid mortgage payment history. In other words, you shouldn’t have any late payments in the last 12 months even though the VA makes an exception for one late payment.
If you do have that late payment, it shows lenders that you are a risk of default. If they decide to take the risk and give you a loan, they will likely increase your IRRRL interest rate.
Your Credit Score – Past or Present
Technically, lenders don’t have to pull your credit for the VA IRRRL program. But many lenders still do just to make sure that you are a good risk. The VA doesn’t underwrite or fund your loan – the lender does all of the work and takes all of the risk. Because of this, the lender may require that they pull your credit report.
If your credit score dropped since you originally bought the home, you may get a higher VA IRRRL interest rate than you would if your credit score was the same or higher than before. Lenders use your credit score and history to determine how well you pay your bills. If you paid other bills late within the last 12 months, it could force a lender to think that you are too risky and will give you a higher interest rate.
Your New LTV
Again, the VA doesn’t require you to get a new appraisal, but the lender can still determine your LTV or loan-to-value ratio. This is the comparison of your outstanding mortgage balance to the home’s value. Because the VA doesn’t require an appraisal, the lender can either use your original purchase price for the home or they can run an automatic valuation on the home to get an idea of where the home’s value is today.
If it hasn’t been all that long since you bought your home with VA financing, your LTV may still be rather high. Obviously, the lower the LTV you can get, though, the better your chances of getting a lower interest rate become.
You can decrease your LTV by making home improvements and asking the lender to turn a valuation on your home. You can also lower your LTV by making extra payments towards your loan’s principal. You can pay extra monthly or just as a lump sum when you have extra money, such as at tax return time.
The Length of the Term
The final determinant in your VA IRRRL interest rate is the loan’s term. It will serve you well if you are able to take a term lower than 30 years. If you stick with the 30-year term, you put the lender at higher risk because you have the money outstanding for a longer period.
In addition, if you stick with the 30-year term, you basically reset your loan. The years you’ve already paid on the loan get added right back onto it. While this isn’t the end of the world, it does mean that you’ll carry a mortgage that much longer, which could affect your retirement.
The less time you borrow the lender’s money for, though, the lower the interest rate they will be willing to provide.
It all comes down to risk. Lenders want to know that you pose a low risk when it comes to taking out a loan with them. If you use your current lender, you may have an easier time getting that lower interest rate, especially if you’ve had good financial habits. If you use a different lender, you’ve got your work cut out for you. It’s time to prove that you are a low risk and that you deserve the low VA IRRRL interest rates.