If you’re eligible, a VA loan is hard to beat when it comes to favorable mortgage terms. VA loans often offer competitive rates, generally require no down payment, and don’t require PMI. That makes them very accessible to a wide range of financial situations.
But what if you want to refinance a VA loan? Which option is best—and how do you decide? Here’s what you need to know.
The 2 VA refinance options
Option 1: The VA Streamline Refinance (IRRRL)
An Interest Rate Reduction Refinance Loan (IRRRL) is a simplified refinance for eligible borrowers with an existing VA-backed home loan. It exists to:
- Help you to take advantage of a lower interest rate
- Allow you to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan
The IRRRL requires less paperwork than a standard refinance, so it’s a convenient way to make your current VA loan work better for your situation. The VA typically doesn’t require an appraisal or income verification, although individual lenders may.
Before you can close on an IRRRL, at least 210 days must have passed since the first payment due date, and you must have made at least six consecutive monthly payments on your current VA loan.
For more on how an IRRRL works, what it costs, and how to prepare, read our guide to streamline refinancing a mortgage.
Option 2: The VA cash-out refinance
A VA cash-out refinance replaces your current mortgage with a new VA loan under different terms. You may also be able to borrow more than you owe and receive the difference in cash.
This is a way to effectively turn your home equity into cash. You can use the cash to pay for home improvements, high-interest debt, education, or emergency expenses. But unlike a standard home equity loan, you won’t have two separate monthly loan payments with a cash-out refi. You’ll just have your mortgage payment. Plus, you may qualify for lower interest rates than you would with a home equity loan or HELOC.
VA cash-out refinances may let you access more of your home’s value than a conventional cash-out loan. Fannie Mae generally sets an 80% cap on cash-out refinances for one-unit residences, meaning you’d need to keep at least 20% equity in the property. VA guidelines may allow you to borrow up to 100% of your home’s appraised value, though specific lenders may enforce their own caps.
You don’t need an existing VA loan to qualify. If you’re eligible, you can refinance a conventional or FHA mortgage into a VA loan. Just note that refinancing could increase your monthly payment or extend your loan term. Your lender will also order a new appraisal, which can add to your closing costs.
Can you refinance out of a VA loan?
You can absolutely refinance out of a VA loan. Doing so may make sense if you have at least 20% equity and can get a better conventional loan rate without paying another VA funding fee. You don’t necessarily need 20% equity to refinance, but having at least that much could help you avoid private mortgage insurance (PMI), which conventional lenders generally require when your loan-to-value ratio (LTV) exceeds 80%.
When you take out a VA loan, you generally need to plan to use the home as your primary residence. But that doesn’t mean you have to live there forever.
That’s good news, as you don’t necessarily have to refinance just because you later decide to turn your home into a second home or a rental. Moving out can still affect your options, though:
- A VA cash-out refinance generally requires that you use the home as your primary residence.
- An IRRRL may be an option if you previously lived in the home (even if it’s not your current primary residence).
Keeping your VA loan after you move out doesn’t prevent you from using a VA loan again. However, you may need to come up with a down payment when you buy another home, depending on your remaining VA entitlement and the new loan amount.
Just note that once you swap out your VA loan for a conventional loan, you can’t use an IRRRL on that mortgage in the future—because it’s no longer a VA product.
Can you refinance into a VA loan?
First things first: Veterans, active-duty service members, and eligible surviving spouses may qualify for VA loans. If you qualify for a VA loan, you may be able to refinance a conventional or FHA mortgage with a VA refinance program as well.
Refinancing into a VA loan can help you avoid paying PMI on a conventional loan. Remember, VA loans don’t require PMI. Avoiding that cost can generally save you between 0.46% and 1.50% of your loan amount per year (though you’ll have to pay closing costs and often a VA funding fee to complete your refi).
However, an IRRRL is only for those who currently have a VA loan. You can’t convert a conventional or FHA loan into a VA loan and take advantage of a streamlined refinance.
Costs to factor in
The VA funding fee for a cash-out refinance is generally 2.15% if it’s your first use of the VA loan benefit and 3.30% if you’ve used the benefit before. For an IRRRL, the funding fee is a lower 0.50% of the loan amount. Some borrowers may not have to pay this fee, including:
- Those receiving VA compensation for a service-connected disability
- Active-duty service members who received a Purple Heart before loan closing
- Surviving spouses who receive Dependency and Indemnity Compensation (DIC)
When it comes to closing costs, expect to pay between 3% and 5% of the loan amount. They can include origination fees, title insurance, recording fees, and more. You may be able to roll these fees into the new loan instead of paying them in full at closing.
You may find some lenders that advertise “no-cost” refinances. With these offers, the lender often covers your closing costs in exchange for a higher interest rate. This option may not be worth it if you plan to stay in the home for decades, but it could save you money if you expect to sell or refinance again within a few years.
When a VA refinance makes financial sense
To figure out if a VA refinance makes sense for your financial situation, crunch some numbers.
Standard refinancing
Divide your total closing costs by your monthly savings to calculate how many months it will take to recoup your refinancing costs. The result is your “break-even” point.
For example, if your closing costs amounted to $3,000 and your refinance saves you $150 per month, your formula would be: $3,000 / $150 = 20 months. If you think you’ll keep your mortgage for longer than that (i.e. you won’t refinance or sell before then), you’ll recoup your closing costs and begin coming out ahead on the monthly savings.
IRRRL
On the other hand, an IRRRL is most useful when mortgage rates have dropped below your current rate—enough to considerably lower your monthly payment. It’s also useful when you want to trade your adjustable-rate mortgage for a fixed-rate mortgage.
Cash-out refinancing
With a cash-out refi, your primary goal isn’t necessarily to lower your payment. Instead, you’re often trying to access your home equity. The big question to ask yourself is whether the expense you need the money for is worth taking on a bigger mortgage.
If you plan to apply the money you borrow toward projects like paying down high-interest debt or remodeling your home, a cash-out refi may make sense since it has the potential to save you money on interest or add to your home’s value. Funding an expensive vacation, on the other hand, doesn’t add to your net worth in any way, so it’s generally an unwise use of equity.
Common mistakes to avoid
A VA refinance has the potential to save you a lot of money—or give you access to equity. Before you refinance, though, keep these common mistakes in mind:
- Not shopping around: Rates and fees vary by mortgage lender. Even the same type of VA refinance can have different interest rates. It’s a good idea to collect quotes from multiple lenders.
- Looking only at the monthly payment: There’s more to a good refi than a low monthly payment. If a lender quotes a monthly payment well below what you’re currently paying, it can look like a no-brainer—but it may mean you’re extending the loan term and paying more interest overall. Examine the total cost before deciding.
- Forgetting to check for a funding-fee exemption: Depending on your situation, you may qualify for an exemption from paying the upfront VA funding fee.
- Refinancing too soon: If you’re refinancing to lower your rate but mortgage rates haven’t dropped, it may be worth waiting. The same may be true if you don’t have enough equity to borrow what you need with a cash-out refinance. Otherwise, your closing costs could outweigh the potential benefits of refinancing.
The takeaway
Refinancing a VA loan can be a great way to lower your current interest rate or borrow some money from your equity—or both. Just keep in mind that refinancing isn’t free; you’ll often pay closing costs and a VA funding fee.
You can also convert a VA loan into a conventional or FHA loan if you can get better terms. If you keep the home, refinancing into a non-VA loan may also let you request a one-time restoration of your VA loan entitlement.
Frequently asked questions
Do I need an appraisal to refinance a VA loan?
It depends. If you’re taking out a VA cash-out refinance, you’ll need a new appraisal. A VA Streamline Refinance doesn’t usually require one.
What credit score do I need to refinance a VA loan?
There’s no hard minimum credit score when it comes to refinancing a VA loan. However, some lenders may enforce their own rules. You’ll have to check with the specific lender you’d like to use.
How long does it take to refinance a VA loan?
An IRRRL usually closes within a month because it requires less paperwork. A VA cash-out refinance is more involved and can take up to 60 days.
How soon can I refinance a VA loan after buying?
Before closing on an IRRRL, you’ll typically need to wait at least 210 days after your first payment due date. You must also make six consecutive monthly payments.
Can I refinance a VA loan with no equity?
You don’t need a specific amount of equity for an IRRRL. For a VA cash-out refinance, on the other hand, you’ll need some equity if you want to receive cash. VA guidelines allow you to borrow up to 100% of your home’s appraised value, though some lenders may cap it lower.