If you want a lower mortgage rate or want to change the terms of your VA 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’d like to pull some of the equity out of your home, a VA cash-out refinance allows you to alter your rate and terms while also accessing cash.
VA streamline refinance (IRRRL) vs. VA cash-out refinance
VA IRRRL | VA cash-out refinance |
|---|---|
Refinance to get a lower interest rate or move from an adjustable-rate to a fixed-rate mortgage. | Refinance to tap home equity. |
Can refinance only from a VA mortgage. | Can refinance from a VA or conventional mortgage. |
Some lenders might require minimum credit score, minimum income or an appraisal, and no late mortgage payments within the past 12 months. | Lenders require a minimum credit score and appraisal. |
Home does not have to be your primary residence. | Home must be your primary residence. |
Can roll refinance fees into the new loan. | Can use money from the cash-out refinance to pay the fees, but you must pay all but the funding fee upfront. |
VA 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 (ARM).
- Don't want to take any cash from your home equity.
VA IRRRL eligibility requirements
To refinance into an IRRRL, you must already have a VA mortgage. The IRRRL must also provide a real advantage — what’s known as a net tangible benefit — typically a lower rate or payment, or a switch from an adjustable 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. You just need to have lived there before. For example, if you’re stationed in a new area and want to keep your first home, you can refinance it without living there.
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 one of the following:
- An active-duty service member with at least 90 continuous days of service
- An honorably discharged veteran who meets length-of-service requirements
- The surviving spouse of a veteran
» MORE: See VA loan requirements
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 (DTI) ratio of 41% or lower — though some will accept ratios over 50%. If your DTI ratio is over 41%, the lender will likely take a closer look into your finances.
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
- Are an active-duty service member who received a Purple Heart
- Are the surviving spouse of a service member who died in the line of duty or from a service-related injury
Recoupment rule
The recoupment rule is another requirement for all refinanced VA loans, including IRRRLs. Under this rule, your monthly mortgage payment savings must cover all of your closing costs — minus any lender credits — within 36 months of the loan being issued.
Here’s how you calculate your recoupment period for an IRRRL:
Refinance closing costs / monthly savings = Estimated recoupment period
For example, say you pay $6,000 in covered closing costs on an IRRRL, which includes expenses like the origination fee and any discount points; the VA funding fee is not factored into this calculation. Your monthly payments drop from $1,400 to $1,200 with the IRRRL — a monthly savings of $200.
In this case, you’d calculate your estimated recoupment period like this:
$6,000 / $200 = 30 months
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.
- IRRRLs often don’t require an appraisal, though this can vary by lender and loan amount.
- Closing costs can be rolled into the loan.
- You could close on your loan in as little as a month — much faster compared to the average 45 to 60 days seen with VA cash-out refinances.
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 could end up with a higher monthly payment if you choose a shorter repayment term or refinance an ARM.
- 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. However, the exact amount you can borrow will vary depending on your lender.
VA cash-out refinance funding fee requirement
Like other VA loans, a VA cash-out refinance comes with a funding fee. But how much it’ll be depends on whether you’ve had a VA loan before.
Here’s what to expect:
- If you are refinancing from an existing VA loan (or have ever had a VA loan before), you’ll pay a 3.3% funding fee.
- If this will be your first VA loan, your funding fee will be 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. Additionally, as with IRRRLs (and all VA loans), you’re exempt from the funding fee if you:
- Have a service-related disability
- Received a Purple Heart
- Are 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.
- Closing typically takes 45 to 60 days — longer compared to an IRRRL.
- 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. Though, 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.
NerdWallet writer Ashley Harrison contributed to this story.
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