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How to refinance a VA Loan
Discover your options and the potential risks.
Refinancing your VA loan can help you take advantage of lower interest rates, reduce the length of your term or provide access to cash. Learn about the two main ways to refinance your VA loan and what else you should consider.
Can I refinance a VA loan?
In most cases, yes. VA loans tend to offer flexibility and attractive rates and terms, making them a popular choice. There are two primary ways to refinance a VA loan:
IRRRL or streamline refinance
Rate Reduction Refinance Loan (IRRRL) is often called a streamline refinance because it requires less paperwork than any other VA loan. In fact, it doesn’t require any income documentation, tax returns or employment verification.
This option allows a qualified borrower to refinance their current mortgage to a lower interest rate, saving money on administration fees and interest payments.
Cash-out refinance
If you’re looking for extra cash to pay down debts, cover the cost of home repairs or anything else, consider a cash-out refinance. This new loan replaces an existing loan and taps into your home’s equity for a cash payout.
A cash-out refinance is a bit more complicated than an IRRRL. The application requires documentation like pay stubs and tax returns.
The amount of cash available from a cash-out refinance depends on the value of your property. But qualified borrowers with a VA loan can refinance up to 100% of the appraised value. For example, let’s say you owe $200,000 on a property with an appraised value of $250,000. You may be eligible for a cash-out refinance of 100% or a new loan amount of $250,000. The amount of cash available is roughly $50,000, which is the difference between the old loan and new loan, less closing costs.
VA refinance eligibility
VA refinances generally require:
- Certification that you’ll be occupying the home.
- Approved application for a Certificate of Eligibility.
- Debt to income ratio maximum of 41%.
- Stable, reliable income.
- Credit score above 500 — though most lenders require 580 or higher.
How to refinance a VA loan
Refinancing a VA loan is similar to applying for a first mortgage:
- Define your goals. Do you want a lower interest rate, a shorter repayment term or a longer repayment term? Do you need access to cash? Determining what you want helps you narrow down the right refinancing option for your situation.
- Pick your VA program. Consider your goals to determine whether an IRRRL or cash-out refinance is right for you.
- Find a lender. Compare your current interest rate and terms to your VA loan options to see if it’s worth refinancing. Finally, shop around to find a lender that meets your needs.
- Submit paperwork. Just like a standard mortgage, you’ll need to submit documentation to apply for refinancing. But an IRRRL has a simplified process and requires less paperwork than a cash-out refinance.
When should I refinance my VA loan?
It depends on your reasons for refinancing. If you’re looking for a lower interest rate or lower mortgage payments, look into an IRRRL as soon as interest rates drop below your current rate. And since private mortgage insurance isn’t required for VA mortgages, you don’t need to have a lot of equity before refinancing.
Make sure refinancing makes financial sense by weighing the costs against your potential savings.
Pros and cons of a VA loan refinance
Refinancing a VA loan can mean potential savings, but there are also a few potential drawbacks.
Pros
- Possible lower interest rate. An IRRRL can lower your interest rate, except if you’re refinancing from an adjustable-rate mortgage.
- Shorter loan term. An IRRRL can shorten your repayment term and help you get out of debt faster. But that likely means higher monthly payments.
- Withdraw cash. A cash-out refinance lets you tap into your home equity to pay for any large expenses, such as home renovations or to consolidate debt.
Cons
- VA funding fee. You may be on the hook for a fee ranging from 1.4% to 3.5% of your loan amount, depending on your down payment amount.
- Owner-occupied properties. VA loans require that you live in the property you want to refinance.
What are my other refinancing options with a VA loan?
If a VA loan isn’t the right fit for your situation, you could consider refinancing your existing VA loan into another type of mortgage:
- Conventional loan. Conventional loans have fewer borrower and property restrictions than VA loans. For example, they can be used for second homes and investment properties that might not be approved by an VA loan.
- FHA loan. Since the VA will only provide veterans with a limited amount of resources at one time, refinancing with an FHA loan may help reclaim VA loan benefits.
Bottom Line
You have two ways to refinance your VA loan to take advantage of lower interest rates, reduce your monthly payment or tap into your home’s equity. Compare refinancing options to find the right one for you.
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