VA Cash-Out Refinance: How Does It Work? (2024)

If you’re a current or former member of the military (or their spouse) looking to refinance your mortgage to a lower rate and tap into your home’s equity for extra funds, a cash-out refinancing could be a good option. The U.S. Department of Veterans Affairs (VA) offers a cash-out refinance loan specifically for these eligible borrowers.

Here’s how a VA cash-out refinance works, how to qualify and if it could help you meet your financial goals.

What Is a VA Cash-out Refinance?

A VA cash-out refinance is available to all mortgage borrowers—regardless of whether they already have a VA loan—as long as you’re an eligible service member, veteran or spouse. With the cash-out option, you can refinance into a larger loan and use the extra money for many options, such as making home improvements or covering closing costs.

An interest rate reduction refinance loan (IRRRL) is another refinancing option, but it’s only available to borrowers who already have a VA loan. It works similarly to refinancing a conventional loan in that you can use it to get a lower interest rate, change the length of your loan or update other terms.

When to Consider a VA Cash-out Refinance

There are certain cases when a VA cash-out refinance makes sense. For example, if you:

• Need help paying for closing costs. Unlike a VA streamline refinance, you aren’t allowed to roll your closing costs into your loan balance with a VA cash-out refinance. However, you can use the cash you take out to pay for those costs. Considering that closing costs can be about 2% to 5% of your total loan amount, that’s a significant amount of money that you otherwise might not be able to pay upfront.
• Need help paying other expenses. Another good reason to choose a VA cash-out refinance over an IRRRL is to get money for certain major expenses at a relatively low interest rate. For example, you can use the funds to pay off other high-interest debt, cover college expenses or make home improvements to increase your home’s value.
• Want to refinance a non-VA loan into a VA loan. There isn’t a requirement that says you have to take out cash, so you could always just refinance with the cashout option to get a VA loan.

VA Cash-out Refinance Guidelines

To get a Certificate of Eligibility (COE), which tells potential lenders that you meet the VA’s standards for getting a VA loan, you need to meet certain VA loan requirements.

• Length of service: For example, if you’re an active service member or veteran, you need to have served for a minimum length of time in most cases.
• Veterans must have been honorably discharged: A dishonorable discharge will likely disqualify you for a VA loan.
• Credit score: The VA doesn’t impose any specific requirements for credit score, debt-to-income (DTI) ratio or down payment to qualify for a cash-out refinance. However, many lenders have their own eligibility criteria and often require a score of at least 620 to qualify.
• Loan-to-value (LTV) ratio: In most cases, you can refinance up to 100% of your LTV. However, some lenders may limit the amount you can borrow to 80% to 90% of your home’s appraised value.

VA Cash-out Refinance Cost and Fees

In addition to closing costs, all VA loan borrowers need to pay the VA funding fee. This is a one-time cost that helps keep the program running. The amount of the funding fee depends on whether it’s the first time you’re using a VA loan or not:

• First-time borrowers: 2.3%
• Borrowers who have taken out a VA loan in the past: 3.6%

The fee amount can also depend on how much your down payment is—but with a cash-out refinancing loan, a down payment isn’t required. The funding fee is due at closing but you can opt to cover it with the proceeds of your cash-out refinance.

You should consider how the interest rate will impact the overall cost of the mortgage as well. Since VA loans are partially insured by the government, they’re considered less risky than conventional mortgages. For that reason, VA cash-out refinance rates tend to be lower than that for traditional cash-out refinance loans.

But before applying for a VA cash-out refinance, be sure to compare loan options from multiple lenders and see if it makes sense for you financially.

How to Find the Best VA Cash-out Refinance Lenders

Even though VA loans are funded by private lenders—not the VA itself—not all lenders are authorized to provide VA loans. You’ll need to find an approved lender in order to apply for VA cash-out refinancing.

Since requirements and terms will vary, it’s a good idea to compare offers from multiple lenders before filling out an application. Check with banks, credit unions and online lenders to find the best VA mortgage lender for you.

Keep in mind that many online lenders will allow you to submit a few key pieces of information and get a quote right away without having to go through the full application process and a hard credit check.

Saving Money With a Cash-out Refinance

When it comes to your mortgage, there are several ways to save money. For example, you can refinance to a loan with better rates and terms. Plus, you can leverage your home equity to pay off high-interest debt or increase your home’s value. A VA cash-out refinance loan could also help you do both.

However, this refinancing option doesn’t always result in savings. Once you determine whether you qualify for VA cash-out refinancing, it’s important to crunch the numbers and be sure that it ultimately makes sense for your situation.

There are also other alternatives you can consider if your main goal is getting cash, such as a home equity loan or line of credit—neither of which require a VA funding fee (though the rates may be slightly higher). On the other hand, if your main goal is to lower your rate, there are other less expensive refinancing options without the cash-out component.