VA Streamline Loan and Escrow Accounts
VA streamline refinance loans, sometimes known as an interest rate reduction refinance loan, or IRRRL, have closing costs as with any other loan program. Even though the VA streamline loan requires less documentation there will still be loan fees, most significantly origination charges and title insurance among others. These closing costs may be rolled into the loan amount, paid for out of pocket by the veteran, paid by the lender or any combination of the three.
There’s also escrow accounts, called impound accounts in certain parts of the country. An escrow account is a deposit account established by the VA lender that collects annual property tax and insurance premiums, paid monthly. If property taxes are $1,200 per year, each month, $120 is collected for property taxes, deposited into the escrow account and accrues until property taxes are due. Once due, the lender pays the property taxes on behalf of the borrower.
But in a refinance, an escrow account can’t transfer to the new loan; a new one must be established. For example, a borrower makes payments each month to the lender for principal and interest as well as funds going to insurance and tax escrow accounts. If the borrower pays $150 each month for both, after six months, there is $750 so far collected in the escrow account.
If the borrower refinances after seven months, the $750 escrow account must be replaced with new funds. Given enough equity, the borrower can transfer funds from the equity in the property to a new escrow account. After the loan closes, the previous VA lender will refund the old escrow account directly to their previous customer.
Depending upon both how high the property tax and insurance bills are as well as how many months have been building up in an escrow account, sometimes replacing an escrow account can be a bit expensive. Yes, the borrower receives a refund when the old loan is paid off, but escrow accounts have to be considered when refinancing a VA loan.
