Every VA cash-out refinance is one of two types, and you do not get to choose. VA sorts it by a single comparison, set by law in 2018. The type then decides which extra rules apply - and one of the two carries a required rate drop and a hard recoupment limit.
The new loan amount, including the VA funding fee, does not exceed the payoff amount of the loan being refinanced. Unlike an IRRRL, the loan being paid off can be a VA loan or a non-VA loan.
The new loan amount, including the funding fee, exceeds the payoff of the loans or liens being refinanced. This is the version where you take equity out of the home.
Note the funding fee is inside the comparison. A refinance that looks like a straight payoff can become Type II once the fee is financed.
A required rate drop when refinancing a fixed-rate VA loan. Fixed to fixed, the new rate must be at least 0.5 percent lower - an existing 3.75 percent loan can be refinanced at no more than 3.25 percent. Fixed to adjustable, the new rate must be at least 2 percent lower. Adjustable to fixed carries no rate-drop requirement. The lower rate may not come solely from discount points.
A 36-month recoupment limit, VA-to-VA. Certain fees and closing costs, divided by the monthly principal and interest savings, must be recovered within 36 months. VA's examples: $3,250 of costs over a $200 monthly saving is 16.25 months, which passes; the same costs over a $90 saving is 36.1 months, which fails. The funding fee, escrows and prepaid items such as taxes and insurance can be left out of the calculation.
Both types need a net tangible benefit, fully explained on net tangible benefit. Both require full credit underwriting. Both are capped at 100 percent of VA's reasonable value, including any funding fee and up to $6,000 of energy improvements. Both must be a first lien, with other lienholders subordinating. There is no minimum time you must have held title - you only need to own the property at closing.
Refinancing an existing VA loan also brings a seasoning requirement, which differs between the two types in a way that trips people up. That is on VA cash-out seasoning. If you only want a lower rate on an existing VA loan and no cash, an IRRRL is usually simpler - see IRRRLs.com.
Source: VA Pamphlet 26-7, Chapter 6, Topic 3 Cash-Out Refinancing Loans, sections b and c on the two types, with the Type I rate reduction and recoupment requirements (KnowVA, updated July 9, 2026), under 38 CFR 36.4306. Rules change; confirm before relying on them. Not a commitment to lend.
Bring your current statement and five minutes. We will map your payoff, your likely equity and your options - cash-out, IRRRL or stand pat - and tell you which one actually serves you.