The offers on this page are from advertisers who pay us. That may influence which products we write about, but it does not affect what we write about them. Here's an explanation of how we make money and our Advertiser Disclosure.

How a VA cash-out refinance works

Yahoo Personal Finance· Getty Images
Updated 10 min read

Homeowners who have served in the military and built up equity in their homes may be eligible for a VA cash-out refinance. This home refinance option allows you to qualify for a new VA-backed mortgage loan and cash out some of your equity as part of the new loan agreement.

To qualify for a VA cash-out refi, you must either already have a VA loan for your home or meet the military service requirements to replace your current conventional loan by refinancing into a VA loan. If you are interested in a VA home loan cash-out refinance, here’s what you need to know.

Dig deeper: How soon can you refinance your mortgage?

In this article:

A VA loan cash-out refinance allows a homeowner to replace their current mortgage with a new loan with different terms. Typically, you will only refinance your mortgage if you qualify for better terms with a rate-and-term refinance or access equity in your home through a cash-out refinance.

If you choose a cash-out refinance, you take out a new home loan for a larger amount than your existing loan and then receive the difference in cash.

VA loans are offered by private mortgage lenders but backed by the U.S. Department of Veterans Affairs. This means lenders take on less risk and can offer lower mortgage rates than with conventional loans.

You can qualify for a VA cash-out refinance if you already have a VA loan. However, suppose you have a non-VA loan but meet the VA’s military service requirements to qualify for a VA loan. In that case, you might take a VA cash-out refi to take advantage of the lower interest rates or access equity in your home.

Learn more: How does a cash-out refinance work?

There are strict eligibility criteria for VA loans since they are limited to military service members. Specifically, only the following types of borrowers may be eligible for a VA cash-out refinance loan:

  • Military veterans

  • Active-duty service members

  • Reservists and National Guard members called to active duty

  • Reservists and National Guard members who have performed six years of creditable service

  • Some surviving spouses

In all cases, military service members must meet the requirements for length of service and must have been discharged under any conditions other than dishonorable.

VA cash-out refinancing is available to any borrower who meets the military service requirements, whether or not they already have a VA mortgage for their home. However, a VA loan cash-out refinance is only available for a currently occupied primary residence. You cannot get a VA cash-out refinance for a second home or investment property.

Beyond the military service requirement, specific lending requirements will vary from one VA lender to the next. Most mortgage lenders have requirements for a minimum credit score, a minimum amount of home equity, an acceptable debt-to-income ratio (DTI), and proof of income.

Learn more: How loan-to-value ratio (LTV) impacts your mortgage

Though VA loans are typically less expensive than conventional loans, your VA-backed cash-out refinance will still have various costs. The specific loan terms, rates, and fees will vary depending on the lender. This is why it’s a good idea to get quotes from several mortgage lenders to find the right cash-out refinancing loan for your budget.

However, many VA borrowers will also have to pay the VA funding fee, which is similar to mortgage insurance. The fee amount depends on whether the loan is your first VA home loan, or if you’ve already had a VA loan before. The first time you get a VA loan, the VA funding fee is 1.25% to 2.15% of the amount borrowed, while it costs 1.25% to 3.3% for subsequent uses. The exact funding fee amount depends on the size of your down payment.

For example, let’s say you refinance with a loan amount of $250,000. If you originally purchased the home with a conventional mortgage but are now switching to a VA mortgage with a VA cash-out refinance, this will be considered your first use of a VA loan, and you will pay 1.25% to 2.15%, or $3,125 to $5,375. If you purchased the home with an existing VA loan, this is your second use, and you will pay a VA funding fee of up to 3.3%, or $8,250.

You may choose to pay the full VA funding fee as part of your closing costs, or you can roll the funding fee into your loan and pay it off over time.

Read more: VA funding fee exemption — How it works and who qualifies

If you are interested in taking advantage of a VA cash-out refinance loan, you’ll need to follow these steps:

  1. Find a mortgage lender: VA loans are offered by private lenders, and you don’t have to refinance with the same company you used for your existing mortgage. Shopping around can help you find the best VA mortgage lender for your needs.

  2. Get a VA Certificate of Eligibility (CoE): This certificate indicates you are eligible for a VA loan. You can get your CoE through the VA’s website or your lender.

  3. Provide proof of income and other documentation: Your lender will require a number of documents as part of the loan process, including your most recent pay stubs, W-2 forms for the past two years, and IRS tax returns for the past two years.

  4. Close on your new loan: Be prepared to pay refinancing closing costs, including the VA funding fee and any other closing costs imposed by your lender.

Learn more: What is a VA Certificate of Eligibility, and how do you get one?

  • Options for how to spend the cash. While many people use a cash-out refi to pay for home improvements, there are no rules about how to spend the money.

  • Lower rates than credit cards. Instead of paying for a large expense with a high-interest credit card, you can tap into your home equity.

  • Large borrowing allowance. With a VA cash-out refinance, most lenders allow you to borrow up to 90% of your home’s equity, and some even go up to 100%. This is more generous than conventional cash-out refinancing, which usually limits you to 80%.

  • Potentially high rates. Mortgage rates are higher now than during the height of the COVID-19 pandemic. A VA cash-out refinance would replace your original mortgage with a new one, so if you bought when rates were lower, you’d be stuck with a higher rate on your entire new loan balance.

  • Funding fee. When you refinance, you’ll have to pay closing costs again, which include a VA funding fee.

  • Limited to primary residences. You cannot use a VA cash-out refi toward a second home or investment property.

A VA streamline refinance is usually called a VA IRRRL, which stands for VA Interest Rate Reduction Refinance Loan. This loan program refinances your VA loan into another VA loan with no appraisal or credit check, and the funding fee is less expensive. You can’t receive cash from a VA IRRRL, but you can roll an additional $6,000 toward energy-efficient upgrades into your loan.

Learn more: How to refinance your mortgage with bad credit

A HELOC is another tool for tapping into your home equity. It’s a second mortgage — rather than replace your current mortgage with a new one, you take on a second home loan and monthly payment. With a HELOC, you’re approved to borrow a certain amount and borrow from that pool as you need. It’s sort of like the credit card of the mortgage world.

HELOCs have higher interest rates than VA home loan cash-out refinances, but there is good news: The higher interest rate only applies to the money you borrow with the line of credit. A cash-out refinance, on the other hand, replaces your entire mortgage loan with a new rate. If mortgage rates are higher now than when you bought, a HELOC could be a good alternative to a cash-out refi.

Read more: Cash-out refinance vs. HELOC — Which should you choose?

A home equity loan is another type of second mortgage, but unlike with a HELOC, you receive the money in one lump sum. A HELOC is often preferred for purchases like home improvements because you can borrow money as you need it. But if you know exactly how much you want to take out and are comfortable receiving it all at once, a home equity loan could be a good fit.

Dig deeper: Cash-out refinance vs. home equity loan

Personal loans typically come with higher interest rates than cash-out refinancing, but they could be good if you want a smaller amount of money — then you won’t have to replace your entire mortgage with a new one. A personal loan also doesn’t use your home as collateral, so if you can’t make mortgage payments, you don’t risk losing your home in foreclosure.

Yes, the VA will guaranty a loan for up to 100% of the value of your home. For instance, if your home is valued at $300,000, you can get a cash-out refinance for the total loan amount of $300,000.

VA refinance closing costs vary by lender, but the funding fee is relatively easy to predict. Borrowers may need to pay a VA funding fee at closing for their VA cash-out refinancing loan. This fee is 1.25% to 2.15% of the loan amount the first time you use a VA loan and 1.25% to 3.3% for each subsequent use of a VA loan.

While the VA does not require a minimum credit score for refinancing, private lenders that service VA-backed loans will use your credit score to determine your interest rate. It’s common for lenders to require a minimum credit score of 620 for a VA cash-out refinance loan.

It depends on your situation. If you want to make home improvements that will increase the value of your house or another large expense you feel is important, taking money out with a VA cash-out refinance could be worth it. But if it would result in a much higher interest rate than what you have with your current mortgage, you may prefer a HELOC instead.

Yes, you must undergo a home appraisal for a VA cash-out refinance.

No, you must currently have a mortgage on your home to get a VA cash-out refinance. If you’ve already paid off your mortgage, you’ll need to find an alternative way to get cash, such as a second mortgage or personal loan.

This article was edited by Laura Grace Tarpley