VA Cash-Out Refinance: What It Is & How It Works

Written by Meagan DrewUpdated: 28th Dec 2021
Share this article

Disclaimer: This post contains references to products from one or more of our advertisers. We may receive compensation (at no cost to you) when you click on links to those products. Read our Disclaimer Policy for more information.

The Veterans Affairs or VA Cash-Out Refinance is a program that allows qualifying service personnel to replace their dusty conventional loan or VA home loan with a new VA backed loan and access their home equity to pay down debt, take a vacation, make home improvements, or just spend/save it any way they wish.

What Is VA Cash-Out Refinance?

In the VA Cash-Out Refinanceprogram, eligible service personnel will replace their current mortgage with a new VA-backed loan.

During the process of refinancing, up to 100% of the current home equity (varying by the lender) can be taken out in cold, hard cash.

>> More: How to Refinance Your Home Loan

How Does VA Cash-Out Refinance Work?

The path to securing a VA Cash-Out Refinance looks a lot like the path to a new VA Loan. The burden to find a lender with agreeable terms, secure the VA Certificate of Eligibility, gather all the other necessary paperwork, and get a new VA appraisal falls on the borrower.

After the lender vets each individual and their qualifications, the VA will offer up a loan for the new home value.

If the home’s value has increased since the original mortgage was taken out, the difference between the two values can be taken out all or in part for discretionary use.

In other words, a home that initial appraised at $400,000 that now appraises for $425,000 could offer up to $25,000 in cash to refinance. VA Cash-Out Refinance is only permitted for primary residences.

What Are the Requirements for a VA Cash-Out Refinance?

All VA Loans are backed by the Federal Government, allowing VA mortgage lenders a little more leeway in their lending practices.

The VA does not offer loans for just any old Tom, Dick, or Harriet. The VA has strict eligibility requirements that must be met before any loan requirements are even on the table.

To be eligible for a VA Loan, qualified personnel must have served in the Army, Navy, Air Force, Marines, Coast Guard, or Space Force for 181 days of continuous service in peacetime, 90 days during wartime.

The eligibility extends to National Guard and Reserve personnel who have served at least 90 days of activated time with at least 30 days continuous and to the surviving spouses of a service member that dies in the line of duty.

Any service member that was discharged and determined to have a service-connected disability is also eligible regardless of the other eligibility requirements.

Service members do NOT have to be currently holding a VA Loan to use the VA Cash-Out Refinance.

VA Cash-Out Refinance Loans do not have loan limits, but most lenders will use conforming loan limits as set by the Federal Housing Finance Agency as a guide for loan limits and will not offer limitless cash no matter how much equity you’ve built in your home or how long you’ve had your mortgage.

However, the VA Cash-Out Refinance does allow service members to take out up to 100% of their home equity as long as it meets the conforming loan limits for the area.

Debt-to-income ratios also apply to all VA Cash-Out Refinances though the VA Guidelines tend to be slightly more lenient than conventional rates.

>> More: Compare Government Home Loan Options

VA Cash-Out Refinance vs. VA Streamline Refinance

The biggest deciding factor between a VA Cash-Out Refinance and a VA Streamline Refinance is whether the current mortgage is a VA Loan and whether the borrower would like to receive a cash payout from their equity.

VA Cash-Out Refinance is available to service members holding any kind of current mortgage. The VA Streamline Refinance is only for those with a current VA Loan.

A VA Streamline Refinance is simpler for all intents and purposes. The VA and lenders have already vetted your eligibility with a VA Streamline Refinance or VA IRRRL.

The VA Streamline Refinance is ideal for anyone hoping to take advantage of more agreeable loan rates and terms.

The icing on the cake is that eligible personnel can also take out some equity to use how they see fit.

What Is the Max LTV on a VA Cash-Out Refinance?

The LTV or Loan-To-Value calculation is the difference between the current market value and the original loan value.

No need to grab your calculator or to harken back to freshman year probability and statistics class to calculate the Max LTV on VA Cash-Out Refinance, though.

The VA Cash-Out Refinance allows eligible personnel to take out 100% of their LTV.

Does VA Cash-Out Refinance Require an Appraisal?

Eligible service members looking to take advantage of a VA Cash-Out Refinance must be ready to get an updated appraisal of their primary residence.

This home appraisal is what is used to determine Loan-To-Value and the amount of the new VA-backed loan.

The difference between the new appraisal and the loan value is also the determining factor in the size of the check the mortgage holder receives at closing time.

How Much Does VA Cash-Out Refinancing Cost?

VA Cash-Out Refinancing carries closing costs the same as any new mortgage or refinancing will. These fees vary based on the mortgage lenderchosen but range from 3-5% of the loan cost.

VA Cash-Out Refinances also require a VA Funding Fee of 2.3% for first-time borrowers and 3.6% for repeat borrowers.

Benefits of VA Cash-Out Refinance

The VA Cash-Out Refinance is the best option for eligible service personnel that has a conventional loan to take advantage of the lenient loan approval, favorable rates, and terms and get equity back to use at their discretion.

Tips for VA Cash-Out Refinance

The VA Cash-Out Refinance is not free. Mortgage holders are wise to only proceed with the process if the juice is worth the squeeze and the cost is far less than the benefit.

Service personnel interested in the VA Cash-Out Refinance need to also be prepared to do a little leg work to make sure they’re getting the best deal.

Bottom Line: VA Cash-Out Refinance

The VA Cash-Out Refinance is a great option for any service-members who have a current VA or Conventional Loanand are looking to use the equity they have worked hard for to make improvements, take a vacation, pay education expenses, etc. higher interest loans, or just cushion their nest egg.

This option allows flexibility and agreeable terms thanks to the benefit of government backing for all eligible personnel.

Keep Reading:

Meagan Drew
Meagan Drew

Meagan Drew is a Senior Personal Finance Writer & Product Analyst with 7 years experience in wealth management. As a former Series 7 and 63 certified advisor, Meagan specializes in making financial topics relatable and consumable, no matter the reader’s experience level. She attended the United States Military Academy at West Point where she studied Nuclear Engineering. Meagan is a veteran, military spouse, and mom of 4 currently living in Colorado Springs. Her areas of expertise are military personal finance, credit cards, personal loans, investing, and wealth management.