VA loan refinance options: 2022 VA IRRRL and cash-out
Can you use a VA loan to refinance?
The VA loan program isn’t just for home buyers. Eligible homeowners can use a VA loan to refinance their mortgages, too.
Like all VA loans, a VA refinance has unique benefits, including:
- No private mortgage insurance
- Easy loan qualification standards
- Capped closing costs
- 100% cash-out option
What’s more, VA refinance rates are typically the lowest of any loan program. So eligible borrowers have a great shot at lowering their mortgage rate and payment.
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VA loan refinance options
A VA loan refinance can help borrowers with widely varying needs and goals. Depending on what you want to achieve with your new loan, you may be able to choose from the following refi options:
- VA Streamline Refinance (IRRRL) — A quick, easy, and inexpensive way to reduce your monthly payments and getter a lower mortgage rate. You can also use the IRRRL to reduce your existing loan term or to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (FRM)
- VA cash-out refinance — Need cash for home improvements, debt consolidation, or almost any other purpose? A VA cash-out refinance lets you access your home equity to receive a lump sum of cash at closing. Every other sort of mortgage allows you to cash out only a proportion of that difference. But uniquely, a VA loan refinance allows you to cash out 100% of your equity if you qualify
- VA renovation loan — It’s sometimes possible to use a VA loan to buy a fixer-upper and renovate it, all within the same mortgage. And, if you already have a home that needs a lot of work, you may be able to refinance to pay for repairs and improvements. But VA renovation loans can be hard to find. So read on for more information
- VA manufactured (“mobile”) home loan — The VA lends for manufactured home purchases, providing the home meets its standards. And you should be able to refinance one of those loans in the normal way
The right option for you will depend on what you want to accomplish by refinancing.
For instance, do you simply want a lower interest rate and monthly payment? Then a VA Streamline (IRRRL) is probably best. But if you need cash, you’ll have to go with a VA cash-out loan because the IRRRL doesn’t allow cash-back at closing.
The VA Streamline Refinance (IRRRL)
The VA Streamline Refinance is also known as the ‘IRRRL,’ which stands for Interest Rate Reduction Refinance Loan.
The main purpose of this program is to help borrowers with existing VA loans access lower mortgage rates. If you can get a better rate, you should be able to reduce your monthly mortgage payment and save money both in the short- and long term.
In fact, the VA usually requires that you can lower your rate to be eligible for a VA IRRRL. But there’s an exception.
You might also be eligible if you can switch from an adjustable-rate mortgage to a fixed-rate mortgage. That’s because the stable payments on an FRM are less risky for homeowners and lenders. Switching from an ARM to FRM is a particularly good idea when mortgage rates are rising, as you could avoid future rate and payment increases.
IRRRLs are called ‘streamline’ loans because they require less paperwork than other refinance programs. That can make them faster to close and bring lower closing costs.
Technically, your lender doesn’t have to look at your credit report or verify your employment (though some do anyway to make sure you can afford your payments). And a home appraisal isn’t required.
However, each lender is free to set its own qualifying standards. So choose one that treats IRRRL refinances in the way the VA intended: with minimum paperwork and hassle.
VA IRRRL closing costs
Even the most easygoing lender will have some VA refinance costs. But they should be lower than the ones you paid for your existing mortgage.
In addition, with an IRRRL, you’ll have to pay a VA funding fee of 0.5% of the loan amount. That would be $1,000 on a $200,000 mortgage. But you can roll up your closing costs (including that fee) and add them to your new loan.
However, you can’t take out any cash with a VA Streamline Refinance.
Well, almost none. Because there is one exception. You can increase your mortgage balance by up to $6,000, but you must use that money to improve the energy efficiency of your home.
Get quotes from several different lenders before you commit to anything. Those will provide you with all the details of your IRRRL, including closing costs. Compare those to pick your best deal.
Also check that you can break even with your closing costs in a reasonable amount of time. If it would take many years for your monthly savings to balance out with your upfront costs, a refinance might not be worth it.
VA IRRRL eligibility
Of course, you already have a VA loan. So you shouldn’t have to worry about getting a new certificate of entitlement (COE).
Your existing mortgage should be in good standing. And the VA’s website says:
“You may be eligible for an IRRRL if you meet all of the requirements listed below.
“All of these must be true. You:
- Already have a VA-backed home loan, and
- Are using the IRRRL to refinance your existing VA-backed home loan, and
- Can certify that you currently live in or used to live in the home covered by the loan
“Note: If you have a second mortgage on the home, the holder must agree to make your new VA-backed loan the first mortgage.”
The VA cash-out refinance
A VA cash-out refinance is unique among mainstream mortgage programs. Because, unlike any other, your new loan can be up to 100% of your home’s appraised value.
How much cash-back can I get with VA?
Thanks to the VA’s 100% financing rule, you may be able to take out every cent of your home equity using a VA cash-out refinance. That includes the amount of your home’s value you’ve paid down as well as the amount it’s increased due to home price inflation.
Keep in mind, you need to qualify for the loan amount. Your lender will only let you cash out 100% of your home’s equity if you have strong financials showing you can pay the money back.
In addition, not all lenders allow a 100% VA cash-out loan. So if you want to get the maximum cash back, make sure you ask about lenders’ policies before you apply.
When is a VA cash-out refi a good idea?
Cash-out refinances have long-term implications for your financial health. You’re borrowing a bigger amount, normally for a longer time. And, even with low VA loan refinance rates, that’s expensive.
That means you should be careful about when and why you cash out home equity. It’s best not to use a cash-out refinance for short-term treats, such as vacations, cars, or weddings. Other, shorter-term types of borrowing may suit you better even if they have moderately higher interest rates.
That said, there are some very smart uses for a cash-out refinance. These can include:
Many people use cash-out refinances to consolidate their existing debts. And that can be great. Because it can hugely reduce the amount you pay on debts and high-interest credit cards from month to month.
But you need to ask yourself how you built up such big debts in the first place. And then find a way to stop running them up again. Otherwise, you’re likely to find yourself even worse off within a few years. Household budgeting can be very helpful, as can working with a credit counselor.
Generally, it’s best to use a cash-out refinance to invest in your future. For example, when you want to:
- Do home improvements that add to your property’s value
- Undertake an educational or professional training course that might increase your earning potential
- Invest in a surefire business venture
With those, you stand a chance of your extra borrowing costs paying for themselves.
VA cash-out process and closing costs
Unlike with an IRRRL, this type of VA loan refinance is the opposite of streamlined. Expect to go through the full mortgage application process — just like when you bought your home — and pay equal or higher closing costs.
Lenders worry about cash-out refinances because they’re bigger and riskier loans. So they typically come with more scrutiny — and a slightly higher mortgage rate.
Closing costs may be similar to those you paid for your original mortgage: often between 2% and 5% of the loan amount. But, additionally, you may have to pay a higher VA funding fee than first time around: up to 3.6% of the loan’s value.
Again, you can roll those costs up into your loan and pay them down (plus interest) over the lifetime of your loan. But, if you’re borrowing 100% of your home’s value, they will be deducted from the sum you receive at closing.
VA cash-out refi eligibility
The VA’s website says:
“You may be eligible for this type of loan if you meet all of the requirements listed below.
“All of these must be true. You:
- Qualify for a VA-backed home loan Certificate of Eligibility, and
- Meet VA’s — and your lender’s — standards for credit, income, and any other requirements, and
- Will live in the home you’re refinancing with the loan”
Different lenders have different requirements for credit and income. But you may struggle to qualify with a credit score of less than 620. And some lenders may want higher scores than that.
So, just as with IRRRLs, shop around for your best deal among lenders and find one that suits your needs.
Other ways to refinance with a VA loan
The VA IRRRL and VA cash-out loan are the two main refinance programs for VA borrowers. But they aren’t the only ones. In special circumstances, one of the following loans could be a better option.
Refinancing with a VA renovation loan
A VA renovation loan is usually used to buy a fixer-upper home and finance renovations at the same time. But you can also use one to refinance an existing loan and make repairs or improvements to your current home. So, if your place is run-down and has issues, this could be for you.
There’s a big drawback, though. Very few lenders offer VA renovation loans. So you may have to invest some time in tracking one down.
Once you’ve found one, your lender will send an appraiser to determine the value of the home “as-completed.” In other words, what it will be worth once the work is finished.
But the appraiser can’t do that until they’ve seen detailed and itemized quotes from contractors. Only then can they visualize what the home will be after your renovations are finished and decide how much the property will be worth. So get those contractor quotes in early in the process.
After you close on your VA loan refinance, you’ll have 120 days to get the work finished. And you’d need a good reason (COVID-19 lockdowns were considered one) to get an extension.
To refinance with a VA rehab loan, you must have lived in the home for 12 months before you begin repairs. Note that the cost of repairs is capped at $50,000. And there are restrictions on the types of improvements you can make using that money.
VA refinance for manufactured homes
You can use a VA loan to buy a manufactured (a.k.a. mobile) home, providing it meets certain criteria. Most importantly, it must be affixed to a permanent foundation in accordance with government rules. And you must own the land on which it’s sited.
There’s no reason why you shouldn’t use an IRRRL refinance for your mobile home provided you qualify. If you can find a lower mortgage rate than the one you’re paying now, that should help you save on your monthly payments.
But you may struggle to get a VA cash-out refinance. That’s because most manufactured homes depreciate (lose value) over time. So your appraisal may not be high enough to make such a refinance worthwhile or possible.
There may be exceptions. For example, if the land where the home is located — which you must own — has increased in value more than the structure has depreciated. But this is unlikely.
VA loan refinance FAQ
There is a short wait period before you can refinance a VA loan. But it’s only 210 days. That’s the time between making your first payment on the existing loan and the closing date of your new one
That depends on the type of refinance you want. Streamline VA refinances (IRRRLs) are much less costly than VA cash-out refinance loans.
Whichever type of VA refinance you choose, you don’t have to pay your closing costs upfront. Instead, you can add them to your new loan’s balance and pay them down with the rest of your mortgage. Just note that you’ll pay interest on the closing costs if you go this route.
You bet! VA loans have consistently lower mortgage rates, on average, than any other type of mainstream mortgage.
Yes. But they’re generally lower than other refinance programs. For instance, you won’t have to pay for an appraisal which usually saves you a few hundred dollars. And the VA funding fee on a Streamline loan is only 0.5% of the loan amount, as opposed to 3.6% for a VA cash-out refinance.
Your refinanced mortgage can be 100% of your home’s newly appraised value. That’s more than any other type of mainstream mortgage.
Again, that depends on the type of refinance. It’s 0.5% of the loan value for an IRRRL but up to 3.6% for a cash-out refinance.
Several categories of borrowers are exempt from paying the funding fee, ranging from Purple Heart recipients to those receiving VA compensation for a service-connected disability and spouses whose loved one died in service. There’s a full list on the VA’s website.
No appraisal is required if you use the VA IRRRL (Streamline Refinance) program. But the VA cash-out refinance always requires a new home appraisal.
Check your VA loan refinance options
VA-qualified homeowners have great options to refinance via the Department of Veterans Affairs.
Whether you want a lower interest rate or cash-back, a VA program can likely help. It’s just a matter of choosing the right refinance program for your needs.
To get started, connect with a loan officer who can help you understand your VA refinance options and choose the right one for your situation.