VA borrowers have a refinancing option known as the Interest Rate Reduction Refinancing Loan or IRRRL for short. These refinancing loans are offered to qualified borrowers to help obtain a lower interest rate or refinance into a fixed-rate loan.
"An IRRRL is a VA-guaranteed loan made to refinance an existing VA-guaranteed loan, generally at a lower interest rate than the existing VA loan," according to the instructions for participating lenders found in the VA Lender's Handbook, "and with lower principal and interest payments than the existing VA loan. Generally, no appraisal, credit information or underwriting is required on an IRRRL, and any lender may close an IRRRL automatically."
Most borrowers seeking a VA IRRRL seek lower payments and a better interest rate, and naturally some would like to include closing costs into their loan amount. After all, the less money a borrower has to pay out-of-pocket for the loan the better, at least for some VA borrowers.
However, it's important to note that refinancing may result in higher finance charges over the life of the loan.
It's true that VA IRRRLs do permit the borrower to have closing costs rolled into the loan amount. In Chapter 6 of the VA Lender's Handbook you'll find the following guidelines:
"The following fees and charges may be included in an IRRRL; the VA funding fee, and all allowable closing costs, including the lender's flat charge."
The rules also say, "Although VA does not require an appraisal or credit underwriting on IRRRLs, any customary and reasonable credit report or appraisal expense incurred by a lender to satisfy its lending requirements may be charged to the borrower and included in the loan."
The Department of Veterans Affairs does include limitations on some closing costs--specifically where points are concerned. The rules permit the borrower to pay what the VA terms "any reasonable amount" of discount points, but there is a limit of two discount points when it comes to including such points into the loan amount.
VA IRRRL rules state that "the lender may also set the interest rate on the new loan high enough to enable the lender to pay all closing costs, as long as the requirements for lower interest rate and payments (or one of the exceptions to those requirements) are met."
With this in mind, it's important to plan ahead and choose wisely when deciding which closing costs to pay up front and which costs should be financed. Too many add-ons or options included in your IRRRL loan amount and your monthly payments may actually increase rather than go down.