VA IRRRL vs. VA Cash-Out Refinance

If you want a lower mortgage rate or you want to change the terms of your home loan, you can refinance your mortgage into a new one. This standard (or “streamline”) refinance loan is known as an Interest Rate Reduction Refinance Loan, or IRRRL.

Alternatively, if you want to pull some of the equity out of your home, a VA cash-out refinance allows you to change your rate and terms while also accessing cash.

» MORE: See NerdWallet’s picks for the best VA mortgage lenders

VA streamline refinance (IRRRL)

A VA IRRRL may be a solid choice if you:

• Already have a VA mortgage.

• Want to refinance to a lower interest rate to save money or refinance to a fixed-rate mortgage from an adjustable-rate mortgage.

• Don't want to take out any cash from your home equity.

VA IRRRL eligibility requirements

To refinance into an IRRRL, you must already have a VA mortgage. Also, the rate must be lower on your new loan, unless you’re looking to change a VA loan that has an adjustable rate to a fixed rate.

Unlike with most other refinances, your home doesn’t have to be your primary residence to be eligible for an IRRRL. All that’s required is prior occupancy. If you’re stationed in a new area and want to keep your first home, for instance, you can refinance that mortgage without living in the home.

The VA streamline loan also gives you the option of wrapping the closing costs into the new loan.

Service requirements

To qualify for a VA refinance, you must be an active-duty service member with at least 90 continuous days of service, or an honorably discharged veteran who meets length-of-service requirements. You may also be eligible as the surviving spouse of a veteran.

Credit score

Lenders will typically want to see a minimum credit score of 620. As with your original mortgage, a higher score will often get you lower rate offers.

Debt-to-income requirements

Lenders typically like to see a debt-to-income, or DTI, ratio of 41% or lower. However, some lenders will approve loans for borrowers with DTI ratios over 50%. If your DTI ratio is over 41%, your financial profile may be subject to closer scrutiny by the lender.

» MORE: Calculate your debt-to-income ratio

Funding fee requirement

You’ll be familiar with the VA funding fee from your original VA loan, which would have been part of your closing costs. For IRRRLs, the fee is 0.5% of the loan amount.

You don’t have to pay the funding fee if you have a service-related disability, or if you’re the surviving spouse of a service member who died in the line of duty or from a service-related injury. Active-duty service members who have received a Purple Heart are also exempt from the funding fee.

VA IRRRL pros and cons

Pros

• You’ll pay less in interest by lowering your mortgage rate. 

• You could switch from an adjustable rate to a fixed rate. 

• Closing costs can be rolled into the loan. 

Cons

• You must have an existing VA loan. 

• Refinancing to a new 30-year loan could extend the time it takes to pay off your mortgage. 

• You’ll have to pay closing costs, so it may be a while before you break even. 

VA cash-out refinance

If you want to tap into your home’s equity (the value of your home, minus what you owe on your mortgage), you can refinance your current mortgage into a VA cash-out refinance loan.

You’ll have a new, larger VA loan that pays off your old mortgage (which can be a VA or conventional loan), and you pocket the difference.

A VA cash-out refinance loan can be a good fit if you:

• Have a VA loan or conventional loan.

• Want to extract cash from your home equity.

• Can pay all the closing costs upfront or with cash you take out.

• Can get a rate that would result in monthly payments lower than your current mortgage plus payments on a second mortgage (HELOC or home equity loan).

VA cash-out refinance eligibility requirements

The requirements for a VA cash-out refinance are similar to those for an IRRRL, with a few key differences:

• VA cash-out refinance lenders require a VA appraisal. 

• The home has to be your primary residence. 

• Unlike with an IRRRL, you don’t need to already have a VA loan to get a VA cash-out refinance. 

You may be able to finance up to 100% of the appraised value of your home, though the exact amount you can borrow will vary depending on your lender.

VA cash-out refinance funding fee requirement

If you are refinancing from an existing VA loan (or have ever had a VA loan before), you’ll have to pay a 3.3% funding fee.

If this will be your first VA loan, your funding fee is 2.15% of the loan amount.

You can roll the funding fee into the cost of the loan, but all other closing costs have to be paid upfront.

As with IRRRLs (and all VA loans), you’re exempt from the funding fee if you have a service-related disability or received a Purple Heart, or if you’re the surviving spouse of a service member who died in the line of duty or from a service-related injury.

VA cash-out refinance pros and cons

Pros

• You can refinance your mortgage and pull cash out of your home equity at the same time.

• You’re allowed to refinance from a conventional mortgage to a VA loan, which typically has lower rates.

• You’ll only have one home loan, compared to keeping your original mortgage and getting a second loan to access your equity. 

Cons

• If rates have gone up since you got your original mortgage, your interest payments could be much higher after refinancing to a larger loan. 

• If you can’t keep up with payments, you could lose your home. 

Technically, you’re allowed to use the money from a cash-out refinance however you want, but it’s best to use it for home improvements and other expenses that will help grow your wealth.

» MORE: Calculate your refinance savings

Other VA refinance requirements

In addition to requirements set by the government, the lender is able to put its own requirements on VA loans. And if one lender says no, it doesn’t mean that you can’t qualify for a VA loan somewhere else.