Which VA refinance fits: IRRRL, Type I or Type II
Want to refinance
with VA?
Do you want cash
from your equity?
Yes
Type II
cash out
No
Is your current loan
a VA loan?
No
Yes
Type I
move FHA or
conventional into VA
Lowering your rate
is the main goal?
Yes
IRRRL
streamline
Type I can also replace
a VA loan when an IRRRL
doesn't fit your goal.
Which VA refinance fits your goal.
Type I: refinancing into VA
A Type I cash out refinance is any VA refinance where the new loan amount doesn't exceed what you currently owe. Despite the name, you aren't taking cash out.
The most common use is moving from an FHA or conventional loan into a VA loan. Veterans who bought before using their benefit, or who used FHA, can refinance into VA to drop monthly mortgage insurance, lower the rate, or both. It's the route into VA when an IRRRL isn't an option because your current loan isn't VA.
Like the IRRRL, Type I refinances must recover closing costs through savings within 36 months.
Type II: taking equity out
A Type II cash out refinance is one where the new loan is larger than your current balance, so you receive cash at closing. It works whether your current loan is VA or not.
VA itself allows a Type II refinance up to 100% of your home's value. In practice, most lenders cap it at 90%, including the funding fee. The reason: since November 2019, Ginnie Mae, which packages VA loans for investors, won't put VA cash out loans above 90% into its standard pools. They can only go into custom pools that price much worse. A few lenders still offer above 90%, at a noticeably higher cost. For most veterans, plan on 90%.
What both types require
A real benefit. VA requires each refinance to provide a net tangible benefit, such as a lower rate, removing mortgage insurance, moving from an adjustable to a fixed rate, shortening the term, or meeting a financial need with the cash.** Living in the home.** Unlike an IRRRL, a cash out refinance requires the home to be your primary residence.** Full qualification.** Expect an appraisal, credit review, and income verification, similar to a purchase.** Seasoning.** If you're refinancing an existing VA loan, it generally needs 210 days and six payments behind it.** Time to reconsider.** Refinances of a primary residence come with a three day right to cancel after signing, so funds are released a few days after closing.
What it costs
The funding fee is 2.15% for first use and 3.30% after, and it doesn't drop based on how much equity you have. Exempt veterans pay nothing. Given the fee, it's worth comparing a VA cash out against other options, especially if you have a lot of equity.
Smart ways to use the cash
Renovations that add value, paying off high interest debt, or funding a down payment on your next property. I've used cash out refinancing on my own properties to keep building. The key is putting the money toward something that improves your position, not just your monthly spending.
Dropping FHA mortgage insurance
Alicia bought her first home with an FHA loan before she knew she was eligible for VA. She was paying monthly FHA mortgage insurance with no end in sight.
A Type I VA refinance replaced her FHA loan without taking cash out. Her mortgage insurance disappeared, and because she receives disability compensation, she paid no funding fee.
Frequently asked questions
What is the difference between Type I and Type II cash out?
Type I doesn't increase your balance and is often used to move into VA. Type II increases your balance so you receive cash.
How much can I borrow on a VA cash out?
VA allows up to 100%, but most lenders cap it at 90% of value including the funding fee, because loans above 90% price much worse.
Do I have to live in the home?
Yes. VA cash out refinances require the home to be your primary residence.
What is the funding fee on a cash out?
2.15% for first use and 3.30% after, unless you're exempt.