This is for veterans, service members, and surviving spouses who own a home and are thinking about a refinance. It will not tell you which loan saves you money. That depends on your current loan, your quote, and your plans, and only a side-by-side of real numbers can answer it.
Start with your goal
VA's two refinance pages describe three goals. Find yours first.
- You have a VA loan and want a lower monthly payment, or you want to move from an adjustable rate to a fixed rate. Look at the IRRRL first.
- You want to take cash out of your home equity to pay off debt, pay for school, or fix up the house. That is a VA cash-out refinance.
- You have an FHA, conventional, or other non-VA loan and want to move it into a VA loan. That is also the cash-out refinance, even if you take little or no cash.
The rest of this post explains why, and what each path asks of you.
What an IRRRL is for
VA's IRRRL page lists three things that must all be true. You already have a VA-backed home loan. You are using the IRRRL to refinance that loan. And you can certify that you live in the home now or used to live there. If you have a second mortgage, its holder has to agree that the new VA loan will be the first mortgage.
The federal rule behind the IRRRL, 38 CFR 36.4307, adds a few limits worth knowing:
- The new loan must be on the same home as the loan it replaces.
- The new loan has to do something for you. In general that means a lower principal and interest payment, a shorter term, or a fixed rate replacing a VA adjustable-rate loan.
- The loan amount is capped at the balance of the old loan plus allowed closing costs and a limited discount. There is no cash back.
- The term can't run longer than the old loan's original term plus ten years, and it can't pass VA's maximum term.
One more point from that rule: an IRRRL does not use up any more of your VA entitlement. It carries over the entitlement you used on the loan being refinanced.
What a VA cash-out refinance is for
VA's cash-out refinance page describes two uses. You can take cash out of your home equity for needs like paying off debt, school, or home improvements. Or you can refinance a non-VA loan into a VA-backed loan.
To qualify, all of these must be true. You qualify for a VA Certificate of Eligibility (COE). You meet VA's standards and your lender's standards for credit and income. And you will live in the home you are refinancing.
The cash-out rule, 38 CFR 36.4306, caps the new loan at the home's reasonable value as VA determines it. You can roll the funding fee into the loan only up to that cap. Any part of the fee above it is paid in cash at closing.
How the two compare, step by step
Here is how the two loans line up on the main points:
- Who can use it. IRRRL: only someone refinancing an existing VA loan. Cash-out: anyone with VA eligibility, including someone with a non-VA loan today.
- Cash back. IRRRL: no. Cash-out: yes, up to the cap above.
- Living in the home. IRRRL: you live there now or used to and can certify it. Cash-out: you will live in the home.
- Credit and income. Cash-out: VA and your lender review both. IRRRL: VA's page does not list a credit or income step, so ask your lender what review they will do.
- Appraisal. Cash-out: VA's page says the lender orders an appraisal. IRRRL: VA's page lists no appraisal step, so ask whether your lender wants one anyway.
- Paperwork. Cash-out: VA lists recent pay stubs, two years of W-2s, and, at many lenders, two years of tax returns. IRRRL: bring the COE from your original VA loan, or ask your lender to pull it.
- Funding fee. Both may charge the VA funding fee unless you are exempt. See VA funding fee: first use vs later use for how use and down payment affect it.
Checks a cash-out lender has to show you
The cash-out rule builds in a few protections. Read them, because they tell you what to look for in your paperwork.
The lender must show the new loan passes a net tangible benefit test. Passing can mean, for example, a lower interest rate, a lower payment, a shorter term, ending monthly mortgage insurance, or moving from an adjustable rate to a fixed rate.
The lender must also give you a side-by-side of the old loan and the new one: payoff amount, loan type, interest rate, term, the total you will pay over the life of each, and loan-to-value. They must estimate how much home equity the refinance removes and explain that this can affect selling the home later. You get this within three business days of applying and again at closing, and you sign that you received it both times.
Timing when you refinance a VA loan
If the loan you are paying off is a VA loan, the cash-out rule sets a waiting period. The new loan can't be guaranteed until the later of 210 days after your first monthly payment or the date you make your sixth monthly payment.
If the new loan is no larger than what you owe on that VA loan, there is a cost test too. Fees and closing costs have to be scheduled to be paid back through lower monthly payments within 36 months. Ask your lender how any waiting period or cost test applies to an IRRRL on your file as well.
Closing costs on either loan
VA reminds borrowers that refinance closing costs can add up to thousands of dollars. On an IRRRL, VA says you can fold those costs into the new loan, or take a higher rate so the lender pays them. Neither choice is free. Either one shows up somewhere in your loan.
A simple check helps here. Divide your closing costs by what you expect to save each month. The answer is roughly how many months it takes to break even. If you may sell or refinance before then, the IRRRL may not pay off for you. Our VA IRRRL refinance checks go deeper on that math, and VA cash-out refinance checks cover the cash-out side.
Watch for offers that sound too good
Both VA refinance pages warn veterans about misleading refinance offers. Claims that you can skip payments, or very low rates and other terms that sound too good to be true, can be signs of an offer to walk away from. Compare more than one lender, and get each quote in writing.
What to ask your lender
Bring these to your next call:
- Based on my goal, is an IRRRL or a cash-out refinance the right fit, and why?
- Will you pull credit, verify income, or order an appraisal on an IRRRL?
- How much equity would a cash-out remove, and what will the total cost look like over the life of the loan?
- Are my closing costs rolled in, paid in cash, or paid through the rate?
- Does a waiting period apply to my current loan, and when is it met?
- Am I exempt from the VA funding fee, and does my COE show that?
FAQ
Can I get cash back with an IRRRL?
No. The IRRRL rule caps the loan at your old balance plus allowed closing costs and a limited discount. If you want cash, look at a VA cash-out refinance.
Can I use an IRRRL if I have an FHA or conventional loan?
No. An IRRRL only refinances an existing VA-backed loan. To move a non-VA loan into a VA loan, VA points you to the cash-out refinance.
Do I have to live in the home?
For a cash-out refinance, you must live in the home you are refinancing. For an IRRRL, you must live there now or have lived there before and certify it.
Will the refinance use more of my VA entitlement?
An IRRRL generally does not. It keeps the entitlement from the loan it replaces. Ask your lender how a cash-out would affect your entitlement.
One thing to do
Write down the one thing you want this refinance to do, then ask your lender which VA loan fits that goal and to show you the costs side by side. If you want help comparing the two, get in touch here.
Disclaimer: Jeff Shin, Mortgage Loan Originator, NMLS #1041652. Chicago. Equal Housing Lender. Not a commitment to lend.
Sources: VA, "Interest rate reduction refinance loan"; VA, "Cash-out refinance loan"; 38 CFR 36.4307, Interest rate reduction refinancing loan; 38 CFR 36.4306, Refinancing of mortgage or other lien indebtedness; BankPricer, "VA funding fee: first use vs later use"; BankPricer, "VA IRRRL refinance checks"; BankPricer, "VA cash-out refinance checks".