VA Refinance: 3 Ways to Refinance a VA Loan

The U.S. Department of Veterans Affairs offers two options for refinancing your mortgage: a streamlined refinance and a cash-out refinance. Both are more generous than many other home loans. You also have the option of refinancing into a conventional loan.

You may be able to refinance with a VA loan even if your income has gone down, your home has lost value, or your current loan is not a VA loan.

Reasons to refinance a VA loan

You might want to refinance a VA loan for several reasons, such as:

• Get a lower interest rate. If interest rates have fallen or your credit has improved since you took out your loan, a VA refinance could lower your rate.
• Switch from an adjustable rate to a fixed rate. Sometimes, people take out adjustable-rate mortgages because they can be cheaper in the first few years. Military service members who move often may find these loans especially attractive. However, if your rate has increased or you would prefer the stability of a fixed-rate loan, a VA refinance can help.
• Tap into home equity. If you need to reduce high-interest debt, pay for school, or work on your home, a VA cash-out refinance loan may be a good option.

Learn More: How to Refinance Your Mortgage in 6 Easy Steps

Options for refinancing a VA loan

You have three options for refinancing your VA loan:

VA streamline refinance (IRRRL)

Best for: Current VA borrowers who want a lower interest rate or shorter loan term with no underwriting or appraisal

A VA streamline refinance, or IRRRL, allows you to refinance regardless of your financial situation and home value. This can help you get a lower interest rate and a more affordable monthly payment. You can use an IRRRL even if the home you’re refinancing is no longer your main residence.

You can also use this loan to catch up on delinquent payments and late fees, but if you’re more than 30 days behind, credit underwriting is required to show that you’re capable of paying for the new loan.

Requirements

• Must refinance an existing VA loan
• Can’t extend your current loan term by more than 10 years
• Must have previously lived in the home

Pros

• Simple application with no income verification or appraisal in most cases
• Closing costs may be lower if the lender doesn’t require underwriting and appraisal
• Can be used for a second home or investment home
• May be able to refinance with negative home equity

Cons

• 0.5% VA funding fee
• No cash-out option
• Must pass underwriting if your payment will increase by 20% or more

VA cash-out refinance

Best for: Tapping home equity; refinancing a non-VA loan

A VA cash-out refinance allows you to take cash out of your home equity on a VA or non-VA loan. You can also simply refinance a non-VA loan into a VA loan — even if you don’t want to take cash out — as long as you’re eligible for a VA loan.

A VA cash-out refinance is different from a conventional cash-out refinance in that you don’t need as much home equity to qualify.

When you do a cash-out refinance with a conventional mortgage, you’ll typically have to retain at least 20% of your equity in the home and can borrow up to 80% of the home’s value. A VA cash-out refinance allows you to borrow up to 100% of your home's value.

Requirements

• Must have enough VA entitlement for the loan
• Must occupy the home as your primary residence after closing
• Must have good enough credit and income to qualify

Pros

• Refinance a VA or non-VA loan
• Refinance even if your mortgage is delinquent
• Borrow up to 100% of your home’s value
• Use cash out to refinance debt, pay for school, repair or improve your home

Cons

• Full underwriting required
• Full appraisal required
• 2.3% VA funding fee (first use); 3.6% funding fee (subsequent use)
• Lender requirements may be stricter than VA requirements

Check Out: Complete Checklist of Mortgage Refinancing Requirements

Refinancing to a conventional loan

Best for: Homeowners with at least 20% equity

To avoid paying the VA funding fee, you may want to refinance into a conventional loan. As long as you have at least 20% equity in your home, you won’t have to pay PMI.

Another reason you might want to refinance to a conventional loan is to restore your full VA entitlement. Then, you can use a new VA loan to purchase your next primary residence and the home you are refinancing as an investment property.

Requirements

• Income must be high enough to cover monthly payments
• The home must be worth more than what you borrow
• Credit score must be at least 620

Pros

• Restore your VA loan entitlement for another use
• No VA funding fee
• Property doesn’t need to be owner-occupied

Cons

• If the property’s value or your income has decreased, you may not qualify
• The interest rate may be slightly higher compared to a VA loan
• PMI is typically required if you don't have at least 20% equity

How to refinance a VA loan

Refinancing means you’ll be applying for an entirely new mortgage loan. The exact process might differ slightly depending on which type of refinance you choose.

Here are the general steps you can expect to take:

1. Select a lender. You can use any bank, mortgage company, or credit union that offers VA loans. The VA recommends shopping around with several lenders to compare terms and fees before you apply.
2. Obtain a certificate of eligibility (COE). For VA cash-out refinance, you’ll need to apply for a COE. You can get one through the VA e-Benefits website or your lender; you can also apply by mail. For an IRRRL refi, submit the COE you used for the original loan. If you don’t have it, ask the lender to get it for you.
3. Gather your documents. The VA recommends that you have the most recent 30 days’ worth of pay stubs, plus W-2 forms for the past two years. Some lenders require two years’ worth of federal tax returns as well.
4. Submit your information. Follow the lender’s instructions for obtaining and submitting any additional information it requires.
5. Pay closing costs. Typical closing costs include a loan origination fee, loan discount points (prepaid interest), credit report, home appraisal (if necessary), and title services. You might also have to pay a VA funding fee.

VA refinance rates

Lenders determine rates for VA refinance loans, and rates fluctuate with market conditions — even over the course of a single day. But they’re often lower than rates for conventional refinance loans.

Here’s a sample comparison of  published rates from USAA for Feb. 11, 2022:

Your actual rate will depend on a number of factors, including your credit score, the loan amount, and whether you’re paying points, which are interest you pay upfront in exchange for a lower rate.

Tip: The VA and the Consumer Financial Protection Bureau warn that unsolicited offers promising unusually low rates are probably too good to be true. Unscrupulous lenders may offer such a rate without disclosing that it’s for a 15-year loan rather than a 30-year one, or that you need to purchase points to qualify for that rate.

VA refinance costs

The interest rate is just one cost you’ll pay for your refinance loan. You’ll also pay closing costs, which, in some cases, include a VA funding fee. Closing costs usually amount to 2% to 5% of the loan amount.

Specific fees vary by lender, but here are some common ones you can expect to pay:

• Funding fee: Ranges from 0.5% to 3.6% depending on the type of loan you get and whether you’ve previously used your VA benefit.
• Discount points: Interest paid in advance; one point equals 1% of the loan amount.
• Origination fee: The lender’s fee for making your loan.
• Appraisal fee: For cash-out refinances only.
• Title services: These include title search, title insurance, and loan and deed recording fees
• Escrow reserves: Funds to cover upcoming homeowners insurance premiums and property tax payments.

It’s important to note that there’s technically no such thing as a refinance loan with no closing costs. Lenders making that claim simply increase the interest rate to cover the costs, or they roll the costs into the loan, increasing the amount you borrow — and the amount of interest you pay over the life of the loan.

Which VA refinancing option is right for you?

When choosing a VA refinance option, think about which loan type best fits your circumstances. In some cases, such as owing more than your home is worth or being unemployed, an IRRRL may be your only option.

If you have choices, see which one offers the best rate and will save you the most money.

Daria Uhlig contributed to the reporting for this article.