The VA IRRRL recoupment test is a single division. Take all includable closing costs and divide by the monthly principal-and-interest savings the refinance produces. The result must be 36 or fewer. That’s the rule 38 U.S.C. § 3709(a) imposes on every VA Interest Rate Reduction Refinance Loan, and it’s the number your lender certifies in writing at closing. This page walks the math, names the fees that count, and runs four scenarios so you can verify any Loan Estimate yourself.
Recoupment formula: months = total includable fees and closing costs ÷ reduction in monthly P&I. Pass at 36 or under.
The VA IRRRL recoupment formula in one line
Recoupment months = total includable fees and closing costs ÷ reduction in monthly P&I.
At 36 or under, the loan passes. At 37 or higher, the lender can’t close the IRRRL as priced. Congress set the ceiling in Section 309 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (Pub. L. 115-174), and the VA implemented it through Circular 26-19-22 with later amendments. And the math is the same whether you finance the costs or pay them at the table.
The numerator
Every fee the borrower incurs to get the loan, with the statutory carve-outs below. Lender origination, discount points, appraisal, title insurance and services, recording, credit report, and attorney fees all sit here.
The denominator
The dollar reduction in monthly principal and interest. Old P&I minus new P&I. Taxes, insurance, and escrow funding stay out.
The 36-month ceiling
Thirty-six months is a hard statutory ceiling, not a guideline (no waivers, no underwriter discretion). A VA-approved lender that closes an IRRRL outside this rule risks loss of VA guaranty. For background on how the rule was written, see the VA IRRRL 36-month recoupment rule explainer. The test is a regulated version of the broader refinance break-even point most homeowners already know.
Which closing costs count toward the recoupment numerator
§ 3709(a)(2) excludes a specific short list of items. Everything else the borrower pays counts.
Costs that always count
Lender origination, underwriting, and processing fees all count, along with discount points in any quantity, the appraisal, title insurance and title settlement, recording, the credit report, attorney fees where the state requires representation, and pest inspection if it’s charged. Every one of those dollars lands in the numerator.
Costs that are statutorily excluded
Property taxes. Escrow deposits under RESPA Section 10 (including tax and insurance cushions). Hazard and flood insurance premiums. The VA funding fee, excluded under § 3709(a)(2) as a “fee paid under chapter 37.” See the VA funding fee detail for how the fee is computed, VA funding fee refund eligibility for retroactive disability ratings, and VA funding fee waiver eligibility for currently exempted borrowers. Prepaid interest is generally excluded under current VA guidance, though treatment has shifted across circulars; your lender should confirm the position on your closing package.
Quick-reference inclusion table
| Counts toward recoupment | Does not count |
|---|---|
| Lender origination and underwriting | VA funding fee |
| Discount points | Property taxes |
| Appraisal | Escrow deposits (tax and insurance reserves) |
| Title insurance and settlement | Hazard and flood insurance premiums |
| Recording fees | Prepaid interest (per current VA guidance) |
| Credit report, attorney, pest inspection |
Source: 38 U.S.C. § 3709(a)(2); VA Circular 26-19-22.
How the monthly P&I savings figure is computed
Pull old P&I from your existing mortgage statement or the new lender’s payoff figure. Pull new P&I from page 1 of the Loan Estimate, Projected Payments column, principal-and-interest line. Subtract. That dollar figure is the denominator.
Taxes and insurance stay out because § 3709(a) only credits reductions in payments other than taxes and amounts held in escrow. Escrow numbers move for reasons unrelated to the refinance, so Congress kept them out of both sides of the equation.
The lender recoupment certification
At closing the lender provides a written statement showing the numerator, the denominator, the resulting recoupment period in months, and a certification that the figure is at or under 36. The VA Lenders Handbook (Pamphlet 26-7) covers IRRRL underwriting in Chapter 6; the certification requirement was added after Pub. L. 115-174. That statement sits alongside the funding fee acknowledgment and the VA IRRRL 210-day seasoning rule attestation.
Worked example A: passes easily
Inputs: existing 30-year VA loan, $300,000 balance, 6.75%. New 30-year IRRRL at 5.75%. Includable closing costs $4,500. Funding fee excluded.
- Old P&I: $1,946
- New P&I: $1,751
- Monthly savings: $195
- Recoupment: $4,500 ÷ $195 = 23 months. Passes.
A 100 basis point cut with moderate fees almost always clears. But exact figures vary by lender and Loan Estimate, so verify with your loan officer before relying on any number.
Worked example B: fails because of discount points
Same loan as Example A. But this borrower buys 2 discount points at $3,000 each to push the rate lower. Total includable costs rise from $4,500 to $10,500. Savings held at $195 to isolate the failure mechanism.
- Recoupment: $10,500 ÷ $195 = 53.8 months. Fails.
Drop the points and Example A returns, and the loan closes. Whether points pay back at all is a separate question, covered in are mortgage discount points worth it.
Worked example C: fails because the rate drop is too small
Inputs: $300,000 balance, current rate 6.25%, new rate 5.875%, 30-year term. Includable closing costs $4,500.
- Old P&I: $1,847
- New P&I: $1,775
- Monthly savings: $72
- Recoupment: $4,500 ÷ $72 = 62.5 months. Fails.
So a 37.5 basis point drop produces too little monthly relief to absorb even modest fees inside 36 months. Lender credits or a no-cost structure are the only paths forward at this rate spread.
Worked example D: no-closing-cost IRRRL passes but shifts the trade-off
Inputs: $300,000 balance, 6.75% current rate. The lender absorbs all $4,500 in closing costs in exchange for pricing the new rate at 6.00% instead of 5.75%.
- Includable costs at closing: near zero
- New P&I at 6.00%: roughly $1,799
- Monthly savings: $147
- Recoupment: near zero ÷ $147. Passes.
The trade moves to the life of the loan. At 6.00% the borrower pays more lifetime interest than at 5.75% with $4,500 paid at closing. And the recoupment test only governs the first 36 months – lifetime cost is the borrower’s separate calculation, and one most loan officers won’t run for you unless you ask.
Common ways a VA IRRRL fails recoupment
So what actually kills these deals at the table? Buying more discount points than the savings can support (Example B). Pairing high lender fees with a marginal rate cut (Example C). Refinancing into a remaining term shorter than 36 months, which makes the test mathematically impossible. Financing every cost while the rate reduction is small, which inflates the numerator without moving the denominator.
Remedies when your IRRRL fails the 36-month test
Lender credits reduce the numerator dollar for dollar. A $2,000 credit on a $4,500 cost stack makes the calculation $2,500 ÷ savings. Removing or reducing discount points cuts cost without touching savings. A no-closing-cost structure shifts costs into the rate, passing the test but raising lifetime interest. Worth knowing: paying selected fees out of pocket doesn’t change the math at all.
Financed vs out-of-pocket costs: a critical misconception
Many borrowers believe paying closing costs at the table removes them from the recoupment numerator. It doesn’t. § 3709(a) reads “all fees and incurred costs,” not “all financed fees.” So a $2,000 title premium paid in cash counts the same as a $2,000 title premium rolled into the new loan balance. The financing choice changes your cash position and the loan amount you pay interest on – but it doesn’t change whether the IRRRL passes recoupment, which is the only question the certification actually asks.
Recoupment vs Net Tangible Benefit: two separate tests
§ 3709(a) is recoupment. § 3709(b) is the net tangible benefit test, which sets a minimum rate-reduction floor: 50 basis points fixed-to-fixed, 200 basis points fixed-to-ARM. A loan must pass both tests independently. Many borrowers conflate them, but the 36-month math is universal while the rate floor varies by product. The VA IRRRL 36-month recoupment rule explainer covers the regulatory backdrop in more depth.
How VA IRRRL recoupment differs from FHA Streamline
FHA Streamline Refinances use a Net Tangible Benefit matrix combining rate and MIP changes against thresholds set in HUD Handbook 4000.1. There’s no 36-month recoupment formula on the FHA side. For the FHA fee side of that comparison, see FHA Streamline closing costs.
Verifying your lender’s recoupment number on your Loan Estimate
Pull Section A (origination charges), Section B (services you can’t shop for), Section C (services you can shop for, where appraisal and title sit), Section E (taxes and government fees), and the P&I line under Projected Payments. Add borrower-paid totals from A, B, C, and the recording portion of E. Exclude the funding fee, escrow deposits in Section G, prepaid interest in Section F, and any insurance premiums. Subtract new P&I from old P&I. Divide. If your number and the lender’s certification disagree by more than a dollar or two, ask for the worksheet – the loan officer who built the Loan Estimate already has it sitting in the file, not waiting to be regenerated.
FAQ
Is the VA funding fee included in IRRRL recoupment?
No. § 3709(a)(2) excludes any fee paid under chapter 37.
Do discount points count toward VA IRRRL recoupment?
Yes. Every point is includable, and over-buying the rate is one of the most common failure modes.
Are prepaid interest and escrow deposits included?
Escrow deposits are excluded. Prepaid interest is generally excluded under current VA guidance, though treatment has shifted across circulars. Confirm with your lender.
Does paying closing costs out of pocket remove them from the recoupment test?
No. § 3709(a) covers all incurred fees regardless of how they’re paid.
What happens if my VA IRRRL fails the 36-month recoupment test?
The lender can’t close the loan as priced. Remedies: lender credits, fewer or no discount points, or a no-closing-cost structure.
How do lender credits affect the recoupment calculation?
They reduce the numerator dollar for dollar before the division.
Is the recoupment test the same as the net tangible benefit test?
No. Recoupment caps cost recovery at 36 months under § 3709(a). The NTB test under § 3709(b) sets a minimum rate-reduction floor. Both must pass independently.
Can a no-closing-cost VA IRRRL still fail recoupment?
Rarely. When includable costs approach zero, any positive savings clears the line. The trade-off is paid in lifetime interest.
Bottom line
The recoupment test is one division, but the inputs are governed by statute and the certification is binding. Pull the fees from your Loan Estimate, exclude the funding fee, taxes, insurance, escrow reserves, and prepaid interest, then divide by your actual P&I savings. And compare quotes from multiple VA-approved lenders before signing. Your math should reconcile to within a dollar or two of the lender’s certification. If it doesn’t, ask for the worksheet.
