VA Cash-Out Refinance: How It Works
Take cash from your home equity, or move a conventional or FHA loan into a VA loan.
A VA cash-out refinance replaces your current mortgage with a new VA-backed loan. The VA describes two main uses: taking cash out of your home equity to pay off debt, pay for school, make home improvements or cover other needs, and refinancing a non-VA loan into a VA-backed loan. Unlike the IRRRL, it is a full new loan with an appraisal and credit and income review.
Who can get one
The VA says all of these must be true:
- You qualify for a Certificate of Eligibility.
- You meet the VA's and your lender's standards for credit, income and other requirements.
- You will live in the home you are refinancing.
You do not need to have a VA loan today. Refinancing a conventional or FHA loan into a VA loan is one of the main reasons people use it, since it removes monthly mortgage insurance.
Two types of VA cash-out refinance
| Type | What it means | Typical use |
|---|---|---|
| Type I | The new loan amount is not more than the payoff of the loan being refinanced | Moving a conventional or FHA loan into a VA loan without taking cash |
| Type II | The new loan amount is more than the payoff | Taking cash out of your equity |
The VA added consumer protections in 2018 and 2019 that apply to both types: the loan being refinanced must be seasoned for at least 210 days from its first payment due date and six monthly payments, and the lender must show you how the new loan compares with your current one, including the time it takes to recover costs.
What it costs
The VA funding fee for a cash-out refinance is 2.15% of the loan amount on first use and 3.30% if you have used the benefit before, whatever your equity. Borrowers who are exempt pay nothing. There are also lender charges, title insurance and an appraisal, and these can add up to thousands of dollars, so ask for a Loan Estimate and compare at least three lenders.
Example: how much cash you would actually receive
A veteran using the benefit for the first time owns a home appraised at $400,000 with a $250,000 balance on a conventional loan, and refinances to a $360,000 VA loan (90% of value). Closing costs are assumed to be $6,000.
| Amount | |
|---|---|
| New VA loan | $360,000 |
| Pay off current mortgage | -$250,000 |
| VA funding fee (2.15%) | -$7,740 |
| Closing costs (assumed) | -$6,000 |
| Cash to the borrower | $96,260 |
| New monthly principal and interest at 6.5%, 30 years | $2,275 |
In this example, about $12,491 of every $100,000 of equity you take out goes to the fee and closing costs. The VA allows cash-out loans up to the full appraised value, but many lenders set a lower maximum, often around 90%.
When it makes sense, and when it does not
- Makes sense: replacing high-interest debt with a much lower rate, removing FHA mortgage insurance, or funding repairs that protect the home's value.
- Think twice: if your current rate is far below today's rates. Refinancing the whole balance to get a smaller amount of cash can cost more than a home equity loan on top of your existing mortgage.
- Avoid: offers that promise you can skip payments or that sound too good to be true. The VA warns about misleading refinance offers.
If you only want a lower rate on an existing VA loan, the IRRRL is usually cheaper. Compare both with the IRRRL calculator.
Frequently asked questions
Can I do a VA cash-out refinance on a conventional loan?
Yes. Refinancing a non-VA loan into a VA-backed loan is one of the uses the VA lists for its cash-out refinance.
How much equity can I take out?
VA rules allow up to the full appraised value, but most lenders set lower limits. Your loan amount also depends on your income and entitlement.
Is the funding fee different from an IRRRL?
Yes. It is 2.15% on first use and 3.30% after, compared with 0.50% for an IRRRL.
Sources
- VA.gov: cash-out refinance loan
- VA.gov: funding fee and closing costs
- VA Lenders Handbook (VA Pamphlet 26-7)
This page is educational and is not legal, tax or financial advice. Rules and rates can change, so confirm the details with the VA and your lender.