Is Using an IRRL a Smart Move for You?

Real Estate Podcast with Patrick Fitzgerald

“Pat, I just closed my VA loan with you. Within two weeks, I’m starting to get letters every week offering me to refinance my home loan. How do they even know I did a loan with you? Why am I getting these offers right off the bat?” This is a question I get asked a lot and a scenario I encounter quite often. We didn’t sell your loan or your information to anybody, but in the state of Texas, whenever someone buys a home, it’s public information if there’s a loan put on it at the courthouse. No other information is recorded—it just denotes that the person bought a home and used a VA loan to do so There are people who sell that information and there are certain mortgage companies who focus solely on an interest rate reduction refinance, or IRRL. This is a product that the VA allows that, in my opinion, got completely out of hand. The VA’s position on it, however, is if the veteran can benefit from a reduced house payment, they see no issue. “In my opinion, these fast and low refinance offers very rarely make sense to pursue.” How does this product work? There are some nice things about it. It greatly reduces paperwork, and in most cases, it doesn’t require another appraisal, any paycheck stubs, or even bank statements. The VA also allows the closing costs to be put into the new loan. We do have to verify in the credit report that the payments have been made on time and for at least the last 12 months. In most cases, you can come to closing with nothing but a pen in hand and can get a lower house payment. So, the payment is lowered, and there are other advantages, but at what cost? In order to get that lower rate, these mortgage companies force you to buy points. This means that once you do the closing, the balance on the rate begins to grow. Let me give you an example of a situation like this I dealt with a few months ago. One of these mortgage companies came to one of my clients that had closed on a home two months prior and offered him a 2.99% rate to refinance a loan that had a $200,000 balance. When I asked him to give me a copy of the good faith estimate, I found that they had $17,000 worth of points and other associated fees to buy that loan down. Did they give him a lower house payment? Yes—it was about $137 per month. The problem, though, was when he came away from closing, he owed $217,000 on the home instead of $200,000. This kind of situation can spell trouble for you if and when you sell your home. In many cases, you have to come to closing with money in order to get out from under the loan. Let’s not forget, in most cases when you sell a home, you’ll also have about 6% in real estate fees. If you tack that onto the extra $17,000, you’ve got a really difficult situation. Do these fast and low refinance offers make sense to pursue? In my opinion, very rarely. If you have any questions about IRRLs, don’t hesitate to reach out to me. I’d be happy to help you!