Refinancing might make it sound like you adjust the terms of your current mortgage. But that’s not actually how it works. When you refinance a mortgage, you get an entirely new mortgage. You then use part of the money from the new loan to pay off your old loan. 

That replacement gives you some options. Even if you don’t currently have a VA home loan, you could use a refinance to get into a mortgage that’s backed by the Department of Veterans Affairs (VA). And if you currently have a VA-backed mortgage, refinancing might be easier than you think. 

All of that is true because the VA guarantees two types of refinances: interest rate reduction refinance loans (IRRRLs) and cash-out refinances. Understanding your choices here helps you pick the best path forward for yourself. 

The two types of VA refis: IRRRL vs. cash-out

Getting a new mortgage backed by the VA comes with some upside. You won't have to worry about private mortgage insurance (PMI) even if you have less than 20% equity in your house. In fact, some lenders will let you refinance up to 100% of your home’s value (for comparison, conventional refis typically cap out at 80–85%). And you can generally get a lower interest rate if you refinance with a VA loan. 

The specific ways the refinance benefits you hinge on the type of new loan you get. Let’s look more closely at your two options from the VA: IRRRL vs. cash-out refinancing. 

Interest rate reduction refinance loan (streamline refi)

The VA offers this kind of refinancing with one goal: to help current VA borrowers realize a net tangible benefit with less paperwork than a typical refi requires. 

Also called a streamline refinance, the IRRRL allows you to get a new mortgage without getting — or paying for — a new appraisal or going through all the rigors of full credit underwriting. (That said, each individual lender gets to decide about their process for IRRRL underwriting. The lender might require you to provide some documentation or get a hard credit check.)

The key thing about an IRRRL is that it has to result in some kind of net tangible benefit for you. The VA backs these kinds of refinances if you can:

• Get a lower interest rate
• Move from an adjustable-rate mortgage (ARM) into a fixed-rate loan, stabilizing your monthly payments
• Shorten your loan term so pay less in interest overall

The other main caveat is that your new mortgage amount can’t exceed the balance of the loan you’re refinancing (i.e., you can’t get cash out). The only reason the VA lets you go over with an IRRRL is in the case of:

• Allowable lender fees/charges
• Up to two discount points
• The cost of up to $6,000 in energy efficient improvements 
• The VA funding fee

There are three main benefits of an IRRRL vs. a cash-out refinance. They are:

1. Less paperwork
2. A lower VA funding fee (0.5%)
3. The ability to refinance even if you no longer live in the home (as long as you can certify that you once lived there)

Cash-out refinance (broadly applicable refi)

Maybe because your refinance won’t result in a lower interest rate or you’re looking for a way to cash out some equity. You still have a path forward. The VA also guarantees what it calls cash-out refinances.

That name is kind of misleading, though. To clear it up, it helps to know that the VA categorizes these refis into two groups:

• Type I cash-out refinance: With this type, your new loan amount doesn’t exceed the payoff amount of your old mortgage. You can use a Type I cash-out refi to refinance any kind of mortgage into a VA loan without liquidating equity. 
• Type II cash-out refinance: This is the typical cash-out refi, where you get a new mortgage with a bigger balance, then pocket the difference. This gives you a way to turn the equity you have in your house into money you can spend. 

With a VA cash-out refinance, you have to live at the property. 

The big upside of this kind of VA-backed refi is that you can use it:

• To cash out some of your equity
• Even if you don’t currently have a VA loan (as long as you can get a certificate of eligibility [COE])
• To refinance your mortgage if you don’t otherwise qualify for an IRRRL

The big downside of a VA cash-out refinance vs. an IRRRL is the cost. Specifically, the VA funding fee is higher. If it’s your first time using this kind of loan, your funding fee equals 2.15% of the total loan amount. If you’ve used it before, the VA funding fee jumps to 3.3%. 

VA IRRRL vs. cash-out refinance: Deciding which is best for you

With a better understanding of the two types of VA-backed refinances, you may have a general sense for which fits your situation. Still, asking a few follow-up questions often helps to provide you with added clarity.

If you want to dig deeper into all of this, the VA has a handbook for lenders about refinancing loans. While you’re not its target audience, that document has a lot of info about what’s required for each type of VA refinance. 

Or, if you’d rather talk it through with a person, you can start exploring your options with lenders that offer VA refinances. We have rate tables showcasing today’s interest rates for both IRRRLs and cash-out refinances. The loan officers at any of those lenders should be able to help you figure out which type of VA refi best matches your needs.