What Can You Do With a VA Refinance Loan?

If you already own a home financed with a VA loan or another type of mortgage, VA refinancing options can help you achieve different financial goals. VA refinance loans come in two main types: the Interest Rate Reduction Refinance Loan (IRRRL) for lowering your interest rate with minimal paperwork, and the VA Cash-Out Refinance for accessing your home equity while potentially lowering your rate or changing loan terms. 

These programs offer Veterans unique advantages, including streamlined processing, competitive rates, and the ability to tap into home equity without the restrictions of conventional refinancing. This guide explores what you can accomplish with VA refinancing and helps you determine which option fits your financial situation.

The Two Types of VA Refinance Loans

Understanding the difference between the two VA refinance options is essential for choosing the right path.

Interest Rate Reduction Refinance Loan (IRRRL)

The IRRRL is designed to lower your interest rate on an existing VA loan. This is the simplest refinance option available to Veterans.

The IRRRL requires minimal documentation and no appraisal in most cases. You can't take cash out with an IRRRL (except for up to $6,000 for energy-efficient improvements), but you can include closing costs in your new loan amount. 

To qualify, you must currently have a VA loan, occupy or have previously occupied the property as your primary residence, and demonstrate that refinancing reduces your interest rate or converts from an adjustable-rate to a fixed-rate mortgage.

VA Cash-Out Refinance

The VA Cash-Out Refinance lets you refinance any type of mortgage (VA, conventional, FHA, etc.) into a new VA loan while taking cash from your home equity. According to VA guidelines, you can borrow up to 100% of your home's current value, though most lenders cap cash-out refinances at 90% loan-to-value.

Cash-out refinances require full income and credit verification, a home appraisal, and may have a funding fee. You must have sufficient equity and meet the lender's credit and income requirements.

What You Can Accomplish With an IRRRL

An IRRRL can be financially useful in several ways. It can:

Help Lower Your Interest Rate: If mortgage rates have dropped since you got your original VA loan, an IRRRL lets you capture those lower rates with minimal hassle. Even a 1 percentage point reduction can save you hundreds per month and tens of thousands over the life of the loan.

Convert from Adjustable to Fixed Rate: If you have an adjustable-rate mortgage and want payment predictability, an IRRRL can convert it to a fixed-rate loan. This protects you from future rate increases and provides budget certainty.

Include Energy-Efficient Improvements: Though IRRRLs don't allow cash-out, you can add up to $6,000 for energy-efficient improvements. This lets you upgrade insulation, windows, HVAC systems, or other qualifying improvements while refinancing your rate.

What You Can Accomplish With a VA Cash-Out Refinance

A VA Cash-Out Refinancing Loan may be the best option for you if you need one of the following:

Access Cash for Major Expenses: You can take cash for large expenses like home renovations or repairs, medical bills or healthcare expenses, education costs, starting or investing in a business, or building emergency reserves.

Consolidate High-Interest Debt: Many Veterans use cash-out refinancing to pay off credit cards, auto loans, or other high-interest debt. This works best if you have substantial credit card balances or personal loans. 

Make Major Home Improvements: Using equity for substantial home improvements can increase your property value while improving your quality of life. Major kitchen or bathroom renovations, room additions, roof replacement, or foundation repairs are common uses.

Replace a Conventional or FHA Loan: If your current mortgage isn't a VA loan, a cash-out refinance lets you switch into the VA program while accessing equity. This can eliminate private mortgage insurance if you currently have an FHA or conventional loan with less than 20% equity.

Eliminate a Second Mortgage: If you have a second mortgage or home equity loan that was part of your original VA loan purchase, you can include it in your cash-out refinance under certain conditions.

Calculating How Much You Can Borrow

There are several things to keep in mind when figuring out how much you can borrow.

Loan-to-Value Ratios: Some lenders limit VA cash-out refinances to 90% loan-to-value (LTV), though the VA technically allows up to 100%. 

Factoring in Closing Costs: Refinancing involves closing costs including appraisal fees, title insurance, recording fees, and the VA funding fee. You can roll these costs into your new loan amount to avoid out-of-pocket expenses.

Residual Income Requirements: You need to meet the VA's residual income requirements, which ensure you have enough money left after paying debts and major expenses to cover daily living costs.

When VA Refinancing Makes Sense

Refinancing can be beneficial.

Interest Rates Have Dropped: If current rates are at least 0.5% to 1% lower than your existing rate, refinancing often makes sense. Calculate your break-even point by dividing total closing costs by monthly savings.

You Need Access to Cash: When facing major expenses, tapping home equity through a cash-out refinance may be cheaper than alternatives like credit cards, personal loans, or home equity loans.

You Want to Consolidate Debt: If high-interest debt is straining your budget, consolidating into a cash-out refinance can provide relief. This works best when you're committed to not running up new debt after consolidation.

You're Converting Loan Types: Switching from an adjustable-rate to a fixed-rate mortgage or from a conventional/FHA loan to a VA loan can provide stability and better terms.

When to Think Twice About Refinancing

You Plan to Move Soon: If you're moving within a year or two, you probably won't recoup closing costs through lower payments.

You're Near the End of Your Loan: If you've been paying your mortgage for 20+ years, refinancing restarts the clock on a new 30-year loan. You'll pay less monthly but far more interest over time.

You Can't Afford the New Payment: Cash-out refinances increase your loan balance, which might increase your monthly payment depending on the new interest rate and loan term.

Your Credit Has Deteriorated: While IRRRLs have lenient credit requirements, cash-out refinances require solid credit. If your credit score has dropped significantly since your original loan, you might not qualify or might receive less favorable terms.

The Refinancing Process

Step 1: Determine Your Goals

Decide what you're trying to accomplish. Lower payments? Access cash? Debt consolidation? Your goals determine which refinance type makes sense.

Step 2: Shop Lenders and Compare Offers

Get quotes from multiple VA-approved lenders. Compare interest rates, fees, and closing costs.

Step 3: Gather Documentation

For IRRRLs, you'll need minimal documentation. For cash-out refinances, prepare recent pay stubs, tax returns, bank statements, and your current mortgage statement.

Step 4: Application and Processing

Submit your application and the lender will verify your information, order an appraisal (for cash-out), and process your loan.

Step 5: Closing

Sign your loan documents and receive your funds. For cash-out refinances, you typically receive the cash within a few days of closing.

Tax Implications of Cash-Out Refinancing

The cash you receive from a cash-out refinance isn't taxable income because it's borrowed money, not earnings. However, the deductibility of mortgage interest depends on how you use the funds.

Mortgage interest is generally deductible only when you use the loan proceeds to buy, build, or substantially improve the home securing the mortgage. If you use cash-out funds for debt consolidation, investments, or other purposes, that portion of your interest may not be deductible.

Consult a tax professional about your specific situation, especially if you're taking out substantial cash.

Making the Right Refinancing Choice

VA refinance options provide flexibility to adapt your mortgage as your life and finances evolve. Whether you're looking to lower your rate with an IRRRL or access equity with a cash-out refinance, these programs offer advantages unavailable with conventional refinancing.

Take time to evaluate your goals, run the numbers on costs versus benefits, and compare offers from multiple lenders. The right refinance at the right time can save you thousands of dollars or provide funds for important goals.

Learn more about VA refinancing and discover how much you could save or access through your home equity.

FAQs

How many times can I refinance with a VA loan?

There's no limit to how many times you can refinance with VA loans. You can do multiple IRRRLs over the years as rates drop. However, each refinance involves costs and a new funding fee, so ensure each refinance makes financial sense.

Can I refinance if I'm underwater on my mortgage?

IRRRLs don't require an appraisal in most cases, so being underwater (owing more than the home is worth) doesn't automatically disqualify you. For cash-out refinances, you need equity in your home to qualify.

How long after getting a VA loan can I refinance?

For IRRRLs, you must wait at least 210 days from your first payment on your current VA loan, and you must have made at least six payments. For cash-out refinances, most lenders prefer that you've had the current loan for at least six months to a year.

Will I lose my original VA loan's lower interest rate if I do a cash-out refinance?

Yes, when you refinance, your old loan is paid off and replaced with a new loan at current market rates. If rates have increased since your original loan, your new rate will be higher. IRRRLs, by contrast, can only reduce your rate.

Can I refinance a non-VA loan into a VA loan?

Yes, through a VA cash-out refinance. You can refinance conventional, FHA, USDA, or any other mortgage type into a VA loan. This is particularly beneficial if you're currently paying PMI on a conventional loan.