The basic idea
VA's cash-out refinance can pay off any type of existing mortgage, not only a VA loan. When the new loan amount is no more than the payoff, VA treats it as a Type I cash-out; when it is more, it is a Type II. Either way, the result is a VA-backed loan with VA's protections.
Why veterans do it
The most common reason is to stop paying monthly mortgage insurance on an FHA or conventional loan, since VA loans do not have monthly mortgage insurance. Others want a fixed rate in place of an adjustable one, or need to pay off a second lien.
How veterans can use a VA cash-out refinance to replace an FHA, conventional or other loan, even without taking cash.
Requirements
You need a Certificate of Eligibility, must occupy the home, must meet lender credit and income standards, and need a VA appraisal establishing reasonable value.
The funding fee
Unless exempt, you pay the cash-out funding fee: 2.15 percent of the loan amount for first use and 3.3 percent after first use, per the VA chart effective April 7, 2023. It can be financed.
Benefit and recoupment
VA requires a net tangible benefit, and for Type I cash-outs, fees and costs must be recouped within 36 months through lower payments.
Comparing
Compare the VA Loan Estimate with keeping your current loan, and with a conventional refinance if your equity is high enough to avoid PMI. Look at payments, the funding fee and total cost over your expected time in the home.
Official source
VA's cash-out refinance page and Lenders Handbook chapter 8 explain the rules in detail.
Sources
Sources checked 10/23/2026. General education only; confirm current rules with official sources and a licensed lender.