Adjustable Rate Mortgages (ARMs) became synonymous with distressed sales over the past five years of the recession. Even the very term “Adjustable Rate Mortgage” (ARM) now smacks of risk and bad debt. The concept behind ARMs was good: Lock in a low, fixed interest rate for 3, 5, or even 7 years, and by the time the rate readjusts (generally meaning increases) to whichever index rate it is tied to, the borrower will:
a) be making more money to afford the higher interest rate
b) will have sold the property, or
c) will have used the time opportunity to pay down more of the mortgage at the lower interest rate.
Unfortunately, reality rarely worked out as well its conceptual version. As we saw in the recent recession, what typically happened is that
a) real wages did not increase, but unemployment did, so few made more to afford the higher payment amount,
b) selling properties without taking a loss was challenging, and
c) paying for iPads, vacations, and nice cars provided an instant gratification that paying down that mortgage simply did not, so when rate readjustment time came, so did the sticker shock.
Given its bad rap, is it ever a good idea to pursue an ARM? Surprisingly, yes, there are some viable ARM products that won’t leave you scrambling to pay a mortgage that conveniently readjusted itself in time for your monthly interest payment amount to double. Now, with the new regulations under the Consumer Financial Protection Bureau’s (CFCB) Qualified Mortgages, even the worst ARMs can only ever readjust to the maximum interest rate from the first five years of the mortgage. For VA Home Loan mortgage holders, there is an even better option, the Interest Rate Reduction Refinance Loan (IRRRL).
What is IRRRL?
The Interest Rate Reduction Refinance Loan is loan refinance product available to those with current VA Home Loans. While most refinance products whisper sweet nothings in the ears of those trapped in poorly structured ARMs and mortgages with balloon payments, offering them the security and stability of a fixed rate mortgages, IRRRL does exactly the opposite. VA loan holders have stability and structure. The loans have fixed rates. There are no balloon payments. However, if you locked in a fixed rate when interest rates are high, for instance, in 2006, when a good mortgage sold with about 6-percent interest, the siren’s call of a low interest ARM may just lure you in. Fortunately, for VA loan holders, harkening to the call of the IRRRL won’t send you to a sure and sudden financial death.
Who is IRRRL Good For?
IRRRL is a good option for those with high fixed rate mortgages who are not refinancing to take equity (cash) out of the home and who can refinance to get a rate that is around 2-percent less than their current interest rate. You do not need to currently occupy the property to refinance; it can be a rental. An IRRRL is generally closed with no out-of-pocket costs associated, so this loan is good for immediate use as it does not require significant budgeting or advance planning to prepare for the refinance costs.
Who is IRRRL Not Good For?
IRRRL is not a good option for those who already have low fixed interest rates and who, upon calculating the cost of the refinancing fees, will not be able to recover the difference in between the cost and interest savings within three years. Remember, when using IRRRL that it is a VA loan product, and thus it comes with a funding fee. The IRRRL is much lower than the other funding fees at 0.5-percent, but this is still a considerable amount that must be accounted for to determine if refinancing is a good financial option for your family.
In most cases, those who refinance can typically skip at least one, and usually two, mortgage payments; however, make sure to consider the long-term cost implications of skipping those payments before refinancing just to save a few dollars right now. Instant gratification (and lots of poor lending practices) brought down the housing industry, so make sure it doesn’t bring down your family’s housing industry venture, too.
If you are interested in pursuing an IRRRL, or if you just want to talk to someone about your options, contact a VA Refinance Specialist today!