Key Takeaways
If you have an existing VA loan, refinancing can help you lower your interest rate, change your loan term, or tap into your home equity. To qualify for a VA mortgage refinance, you must meet certain service, income, and credit score guidelines. The two main options for refinancing a VA loan are an Interest Rate Reduction Refinance Loan (IRRL) and a VA Cash-Out Refinance.
If you're an active-duty military member, veteran, or eligible spouse, refinancing your current mortgage into a VA loan is a smart choice. Fortunately, it's not that difficult to qualify for a VA loan refinance, as long as you meet the military service requirements and the lender's criteria.
Here's everything you need to know about VA loan refinancing: what it is and how it works.
What is VA Loan Refinancing?
A VA loan, or mortgage refinance, is a mortgage product guaranteed by the Department of Veterans Affairs (VA). It allows you to exchange your current loan for a new loan, but with different terms. Depending on the type of loan you choose, you may be able to lower your interest rate, change your loan term, or even convert your home equity into cash.
Additionally, if you initially have an adjustable rate mortgage (ARM) and would like more predictable monthly payments, you can switch to a VA fixed rate mortgage.
Types of VA Loan Refinancing
When it comes to refinancing with a VA loan, you have two main options.
Interest Rate Reduction Refinance Loan (IRRRL): Also known as a VA Simplification Refinance, an IRRRL is available to homeowners with current VA loans who want to secure a lower interest rate. VA Cash-Out Refinance: Mortgage holders can swap their current mortgage for a new mortgage and leverage their accumulated home equity.
IRRRL and VA Cash-Out Refinance
IRRRL VA Cash-Out Refinance Primary Purpose Secure a lower interest rate or switch from an adjustable rate mortgage to a fixed rate mortgage Leverage home equity to cash out Property Type Any residence: primary residence, vacation home, etc. (if previously occupied) Primary Residence Requirements No 30-day late payments in the last 12 months (some lenders) Credit and income criteria must be met Home appraisal by lender Closing Costs Can be rolled into the loan or paid by lender Must be paid upfront by borrower Loan Restrictions Limited to VA-backed mortgages Can be used for conventional and VA-backed loans
Who is eligible to refinance a VA mortgage?
As the name suggests, VA loan refinancing is available to active and former U.S. military personnel. Specifically, here are the conditions you need to meet to qualify for a VA refinance loan:
Service: To qualify for a VA mortgage, you typically need 90 days of active military service during a specified conflict, six years of service in the National Guard or Reserves, or 181 consecutive days of peacetime active military service. Veterans must be honorably discharged, but there are exceptions. You may also qualify if your spouse died in the line of duty or died from a service-connected disability. VA loans also require a Certificate of Eligibility (COE) verifying your military service, which you obtain from the lender or directly from the Department of Veterans Affairs. Income: Borrowers must show sufficient income to repay the loan, with a debt-to-income ratio (DTI) limit typically of 41%. Credit score: The VA does not set a minimum credit score, but most lenders require at least 620 (with the exception of IRRRL, which often does not require underwriting). Property type: Properties purchased with VA loans must be primary residences, not second homes or rental properties. Timing: You must move into your new home within 60 days of signing the contract, with extensions available for up to 12 months under certain conditions. Moving in for longer than 12 months is almost never allowed by the VA.
How to Refinance a VA Loan
Refinancing into a VA loan is relatively easy, although the steps required to obtain the two types are slightly different.
Interest Rate Reduction Refinance Loan (IRRRL)
An Interest Rate Reduction Refinance Loan (IRRRL), also known as a VA Simplified Refinance, allows you to exchange your existing VA loan for a new VA loan with a lower interest rate, and many homeowners take advantage of this to switch from a VA Adjustable Rate Mortgage (ARM) to a fixed rate mortgage.
Other benefits to consider:
This loan is typically available without a home appraisal or underwriting, you don’t have to pay any settlement costs up front, and funding fees are lower than VA new purchase or construction loans.
In terms of costs, there is a 0.5 percent fee for applying for an IRRRL. There are also lender-side closing costs, which you can roll into your new loan. Some lenders will even pay the closing costs for you in exchange for a higher interest rate.
However, you can only qualify for a VA simplified mortgage if the new interest rate is lower than your current interest rate, which means you may have to wait until interest rates drop before you can qualify for a VA IRRRL. However, there is one exception: if you switch from a VA ARM loan to a fixed-rate loan, the interest rate on your new loan may be higher than your ARM rate.
You can also only borrow up to the same amount as your existing mortgage, which means you can't borrow additional money, as is often the case with refinancing — for that you'll need a VA cash-out refinance.
VA Cash Out Refinance
VA cash-out refinance loans allow current homeowners to refinance their mortgage and withdraw some or all of their accumulated equity. This type of loan can be used to refinance an existing VA loan or a regular mortgage, and the VA guarantees the loan up to 100% of the home's value. As with other VA loans, you must meet military service requirements and obtain a COE to qualify for this loan.
It is useful if:
You want to switch from a conventional loan to a VA loan, renovate your home to increase the value of your property, or pay off high-cost debt to save on interest.
If you're considering this option, have clear goals in mind regarding your finances and be realistic about your habits. For example, if you plan to use cash to pay off your credit cards, you'll want to make sure you don't accumulate unmanageable balances again in the future.
For first-time VA mortgages, the funding fee (as of April 2024) is 2.15 percent. However, if you have previously used VA loan benefits, the funding fee increases to 3.3 percent. You will also be responsible for any closing costs.
Benefits of refinancing to a VA loan
The benefits of refinancing with a VA loan are numerous, which is why VA home loans are so popular among those who qualify. Other key benefits of refinancing with a VA loan include:
No mortgage insurance required: VA mortgages don't require mortgage insurance, even if you don't make a down payment. No cash up front: No down payment is required, but refinancing a loan does require settlement costs. Minimal upfront costs: VA loans typically have a funding fee that the borrower pays up front. This fee can be rolled into your settlement costs, but this means you'll pay more interest in the long run. The fee may be waived if you have a service-connected disability or are the spouse of a deceased veteran. Save on interest: VA mortgage rates are usually competitive, and you may be able to save money compared to a traditional loan. Easier to get: VA credit and income criteria are more flexible, so it's easier to qualify, but cash-out refinance loans have stricter eligibility rules. No prepayment penalties: There's no penalty for paying off a VA loan early. More protection for your payments: If you want a consistent monthly payment, you can switch from an adjustable rate to a fixed-rate VA mortgage.
Should I refinance my VA loan?
It depends on your unique financial situation. VA loans offer a variety of perks that may make them a better option. You may get a lower interest rate and more affordable closing costs than other refinancing options. Plus, if you refinance to a VA loan, you won't have to pay mortgage insurance. In fact, you may not have to make a down payment at all.
If you already have a VA loan you want to refinance, IRRRL also allows you to roll over into a new loan without going through an audit If you're looking to access your home equity, a VA cash-out refinance may be a better option, since you could be eligible to take out up to 100 percent of your home's appraised value.
However, there are special costs (funding fees) and certain limitations. Ultimately, you must consider the costs associated with these loan products to determine whether refinancing to a VA secured loan is a smart financial move.
If you're thinking about refinancing your VA or conventional mortgage, you can use our VA loan calculator to estimate what your new monthly payments will be. Many banks, credit unions, and online lenders offer VA loans, but the application can be complicated, so be sure to rely on a VA loan professional.
This list of VA-approved lenders can help you get started, and ask military friends and family about their experiences. Lenders set interest rates and terms, so be sure to compare offers before deciding.