Veterans with a VA-backed mortgage have two refinancing paths that conventional borrowers do not: the Interest Rate Reduction Refinance Loan (IRRRL), which lowers a rate or stabilizes a payment with minimal paperwork, and the VA cash-out refinance, which can reach up to 100% of a home's value with no mortgage insurance.
Both carry a reduced or waived funding fee, neither has a prepayment penalty, and both come with federal safeguards that require a lender to show, in writing, that the new loan benefits the borrower.
Every VA-approved lender must follow those rules to receive the VA guaranty, so the useful question is how to confirm a lender is following them on your loan.
The Two VA Refinance Options
The IRRRL, or Streamline Refinance
The IRRRL replaces an existing VA loan with a new VA loan at a lower rate, or moves an adjustable-rate loan to a fixed rate. The VA's own overview describes IRRRLs as simple, low-cost refinances that do not require income verification or an appraisal. You must already have a VA loan on the property and certify that you live there now or lived there in the past. The new loan must lower your principal-and-interest payment, shorten your term, or convert an adjustable rate to a fixed one. Not every VA lender offers IRRRLs, so ask before you get into rates or paperwork.
The Cash-Out Refinance
The VA cash-out refinance replaces your current mortgage, VA or not, with a new VA loan for more than you owe, and you receive the difference at closing. The VA's cash-out page describes its use for paying off debt, funding education, or covering other needs, and the same loan can move a conventional or FHA mortgage into the VA program. Unlike the IRRRL, a cash-out refinance requires full underwriting, an appraisal, and a Certificate of Eligibility. Talk to a NewDay USA representative about this option.
The Advantages Built Into Both Programs
No Mortgage Insurance at Any Loan-to-Value
Conventional refinances above 80% loan-to-value carry private mortgage insurance, and FHA loans carry mortgage insurance for most or all of the loan term. VA loans carry none. Under 38 CFR § 36.4306, a VA cash-out refinance can go up to 100% of the appraised value, and the one-time funding fee stands in for the monthly insurance premium other programs charge.
A Reduced or Waived Funding Fee
According to the VA funding fee schedule, an IRRRL carries a funding fee of 0.5% of the loan amount no matter how many times you have used the benefit. A cash-out refinance carries 2.15% for first use and 3.3% for subsequent use. Veterans receiving VA disability compensation, eligible surviving spouses, and Purple Heart recipients serving on active duty pay no funding fee on either loan type, and both fees can roll into the loan balance.
No Prepayment Penalty
VA rules prohibit prepayment penalties on all VA-guaranteed loans, which matters more on a refinance than a purchase. If rates fall again after you refinance, you can refinance again without a penalty, subject to the seasoning and recoupment rules below.
Closing Costs Limited by Regulation
The VA caps a lender's flat origination charge at 1% of the loan amount and bars lenders from charging Veterans for certain items altogether. A credit report fee is a legitimate charge on a VA refinance, and NewDay USA may charge one, but once the 1% charge applies, the lender cannot bill application, processing, or lender attorney fees on top of it.
The Safeguards That Make the Advantages Real
Congress added several protections to VA refinancing in 2018 after a period of aggressive refinance marketing to Veterans. The requirements sit in 38 U.S.C. § 3709, and the VA described their purpose when it implemented them: protecting Veterans from predatory refinance practices. These rules are conditions of the VA guaranty, so a lender that ignores them does not have a VA loan to sell.
The Net Tangible Benefit Test
For a cash-out refinance, § 36.4306 requires the new loan to deliver at least one of eight defined benefits: eliminating monthly mortgage insurance, shortening the loan term, lowering the interest rate, lowering the monthly payment, increasing your monthly residual income, refinancing an interim construction loan, bringing the loan to 90% or less of the home's value, or converting an adjustable rate to a fixed rate. For any refinance of an existing VA loan, § 3709 adds a rate floor: on a fixed-to-fixed refinance, the new rate must sit at least 50 basis points below the old one, and on a fixed-to-adjustable refinance, at least 200 basis points below.
The Side-by-Side Comparison, Twice
For a cash-out refinance, the lender must give you a written comparison of the old loan and the new one covering payoff amount, loan type, interest rate, term, total of all scheduled payments, and loan-to-value ratio, along with an estimate of the home equity the refinance removes. You receive it within three business days of your application and again at closing, and you certify both times that you received it. This is the document to read most carefully, and the one to insist on if it does not arrive.
Reading the Comparison Correctly
A payment comparison is only meaningful when both sides include the same components. If the current payment on the form includes taxes and insurance and the new payment does not, the form is not doing its job, and you should ask the lender to correct it before you sign.
The 36-Month Recoupment Rule
Under § 3709, the fees and closing costs on a refinance of an existing VA loan must recoup within 36 months through lower monthly payments, and the lender must certify the recoupment period to the VA. If the closing costs come to $4,800 and your payment drops by $100 a month, the refinance recoups in 48 months and does not qualify. The rule exists to stop refinances that cost more than they save.
Loan Seasoning
A refinance of an existing VA loan cannot close until the later of two dates: 210 days after your first monthly payment on the current loan, and the date you make your sixth monthly payment. A lender that proposes refinancing a loan you closed four months ago is not following VA rules.
How to Confirm a Lender Follows the Rules
Any lender making VA loans has agreed to these conditions, and confirming that a lender is meeting them on your specific loan takes a few questions.
- Ask for the net tangible benefit comparison at application. If the lender cannot produce it within three business days, treat that as a warning sign.
- Check the recoupment math yourself. Divide total closing costs by the monthly payment reduction, and the answer needs to be 36 or less.
- Look at the seasoning dates. Your first monthly payment on the current loan plus 210 days, or your sixth payment, whichever comes later, is the earliest possible closing date.
- Match the components on every payment comparison. Principal and interest against principal and interest, or full payment against full payment.
- Be skeptical of promises. In a joint warning, the VA and CFPB noted that the VA prohibits advertising skipped payments as a way to get cash on an IRRRL, and flagged offers of thousands in cash back or no waiting period as tactics to watch for.
- Compare the Loan Estimate line by line. The CFPB's Loan Estimate shows the funding fee, origination charge, and every third-party cost, which is where the 1% cap and the non-allowable fee rules become visible.
At NewDay USA, the net tangible benefit comparison is a required part of every cash-out refinance.
Read more about VA loans and what to expect at every stage of a purchase or refinance.
FAQs
Do all VA lenders have to follow the net tangible benefit rule?
Yes. The rule is a condition of the VA guaranty for both IRRRLs and cash-out refinances. A loan that fails it is not eligible for the guaranty, so no VA lender can close it as a VA loan.
Can I refinance a conventional loan into a VA loan?
Yes, through a cash-out refinance, even if you take no cash out. The IRRRL is only available to borrowers who already have a VA loan on the property.
How soon after buying can I refinance a VA loan?
Not until the later of 210 days after your first monthly payment and the date you make your sixth monthly payment. That applies to both IRRRLs and cash-out refinances of an existing VA loan.
What is the 36-month recoupment rule?
On a refinance of an existing VA loan, the closing costs divided by your monthly payment savings must come to 36 months or less. A refinance that takes longer to pay for itself does not meet VA requirements.
