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The VA cash-out refinance

The cash-out does two jobs, and most people only know about the first one. It converts equity into money you can use. It also converts a conventional or FHA loan into a VA loan, which is the version almost nobody talks about and the one that saves the most.

Written by Sean Goudreau, Mortgage Loan Officer · NMLS #326155 · Rate

What is a VA cash-out refinance?

A VA cash-out refinance replaces your current mortgage with a new VA loan for more than you owe, and you receive the difference in cash. Unlike the streamline refinance, it is open to borrowers whose existing loan is conventional or FHA, and it requires full underwriting: credit, income and an appraisal. The funding fee is 2.15% on first use and 3.3% on subsequent use.

The two things a cash-out actually does

Almost every article about this loan covers the first job and skips the second, which is backwards, because the second one is where the money usually is.

The first job is taking equity out. You owe $200,000, the house is worth $350,000, and you refinance into a $260,000 loan and walk away with roughly $60,000 minus costs. Straightforward, and it works the same as a conventional cash-out except for the terms.

The second job is changing what kind of loan you have. The VA calls this a cash-out refinance even when you take no cash out at all, which is a naming problem rather than a real one. If you have a conventional loan with mortgage insurance, or an FHA loan with mortgage insurance for the life of the loan, this is the product that gets you into a VA loan and eliminates that premium permanently.

That second version is worth running the math on even when rates have not moved in your favor. Dropping mortgage insurance is a monthly savings that does not depend on the rate, and for an FHA borrower it is a savings that would otherwise never end.

What does a VA cash-out require?

More than a streamline, because the VA is underwriting a new loan rather than replacing one it already guarantees.

VA eligibility, not an existing VA loan

This is the key difference from the IRRRL. You need to be eligible for the VA benefit. Your current mortgage can be conventional, FHA, or anything else. A veteran who bought with a conventional loan before knowing about the benefit can refinance into a VA loan this way.

Full underwriting

Credit, income, employment and debt-to-income all get reviewed. The VA still sets no minimum credit score, but the lender does, and residual income applies the same way it does on a purchase.

An appraisal

Required, because the loan amount depends on what the property is worth. This is the step that most often changes the plan, since the equity you think you have and the equity an appraiser finds are not always the same number.

Occupancy

The property must be your primary residence. This is stricter than the IRRRL, where prior occupancy is enough.

Seasoning

The same 210-day and six-payment rule applies when you are refinancing an existing VA loan. Coming from a conventional or FHA loan, seasoning requirements depend on the lender and the specific circumstances.

How much equity can you access?

Up to 100% of the appraised value in the VA's own rules, which is more than any conventional cash-out allows. Conventional lending generally caps at 80%.

In practice most lenders set their own ceiling below the VA's, commonly at 90%. That is an overlay rather than a program rule, and it varies, so the answer to how much you can take depends partly on who you ask.

Work backward from the appraisal. If the home appraises at $400,000 and a lender allows 90%, the new loan can go to $360,000. Subtract your current balance, subtract closing costs and the funding fee, and what remains is what you receive.

The number that surprises people is what comes off the top. On a $360,000 loan the funding fee alone at 2.15% is $7,740, and it comes out of the proceeds unless you pay it separately.

What does a VA cash-out cost?

The funding fee is the largest line, and it is materially higher than the streamline.

First use runs 2.15%. Subsequent use runs 3.3%. Unlike a purchase, there is no down payment tier to reduce it, so those two figures are the whole schedule.

The same exemptions apply. A VA disability rating of 10% or higher, a Purple Heart on active duty, or an eligible surviving spouse removes the fee entirely. On a cash-out that exemption is worth more than on any other VA loan, because the fee is charged on the full new loan amount rather than a purchase price.

Then normal closing costs: appraisal, title, recording, prepaid escrows. These can be financed into the loan alongside the fee.

The honest framing is that this is the most expensive VA loan by fee, and the reason to do it anyway is usually one of two things. You need the money and this is cheaper than the alternatives. Or you are dropping mortgage insurance permanently, and that recurring savings outruns the one-time cost.

When does a cash-out make sense?

Three situations where the math tends to work, and two where it usually does not.

Dropping mortgage insurance is the strongest case. An FHA borrower paying mortgage insurance for the life of the loan can eliminate it permanently. That is a monthly savings with no end date, and it often justifies the funding fee on its own even at a similar interest rate.

Consolidating expensive debt is the second. Trading credit card debt at 22% for mortgage debt at a fraction of that is real arithmetic. The caution is that you are converting unsecured debt into debt secured by your house, and stretching a five-year balance across thirty years can cost more in total interest even at a much lower rate.

Funding something that lasts is the third. A renovation, a down payment on a second property, a business. The test is whether what you are buying outlives the debt.

Where it usually does not work: taking cash out when rates are meaningfully higher than your current rate. You are repricing your entire balance to get at a slice of equity, and a HELOC or a second mortgage often costs less. And taking cash out shortly before selling, where the fee and closing costs never get recouped.

Where cash-outs go wrong

The appraisal comes in low and the plan collapses. Everything about this loan depends on the appraised value, and that number is not known until well into the process. Building a plan around an estimate from a listing site is how people end up disappointed.

The rate on the whole balance gets ignored. If you have a 3% mortgage and current rates are much higher, a cash-out reprices all of it. The cost of that is frequently larger than the cost of the equity you extracted, and it is not always presented that way.

Consumer debt comes back. The consolidation works, the cards get paid off, and eighteen months later the balances have returned on top of a larger mortgage. This is a behavioral problem rather than a lending one, and it is common enough to name.

The exemption gets missed. Same as everywhere else on this site, and worth more here than anywhere.

The 100% figure gets taken as available. The VA permits it. Most lenders will not. Planning around the program maximum rather than your lender's actual ceiling sets up a shortfall.

* Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. VA Cash-out Refinance not available in Texas. Rate has no affiliation with the US Department of Veterans Affairs. Contact Rate for more information.

Frequently Asked Questions

Can you refinance a conventional loan into a VA loan?

Yes, through a VA cash-out refinance, and you do not have to take any cash out to do it. This is the route for a veteran who bought with a conventional or FHA loan and wants to eliminate mortgage insurance.

How much can you cash out with a VA refinance?

The VA allows up to 100% of the appraised value. Most lenders set their own limit lower, often around 90%. The exact ceiling depends on the lender rather than on the program.

Does a VA cash-out require an appraisal?

Yes. Unlike the streamline refinance, the loan amount depends on the property's value, so an appraisal is required in every case.

Is a VA cash-out refinance worth the funding fee?

It depends on what you are solving. Eliminating mortgage insurance produces a recurring savings that often outruns the one-time fee. Taking cash out when your current rate is much lower than today's frequently does not.

Not sure which refinance you need?

There are two, they cost very different amounts, and the right one depends on what loan you have now. Tell me and I will tell you. No credit pull, no application.

No credit pull or application. Sean will reach out personally.

Sean Goudreau

Mortgage Loan Officer

NMLS #326155

Rate

465 Waverley Oaks Rd Ste 200

Waltham, MA 02452

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