The Quick Read: A VA cash-out refinance can pay off an adjustable first mortgage and replace it with a new VA loan. That new loan can be fixed or adjustable. Leaving an adjustable loan for a fixed one counts as a “net tangible benefit,” which is the VA’s proof that the refinance helps you. The loan still needs a VA appraisal, a Certificate of Eligibility, full credit and income review, and your plan to live in the home. All of this is subject to lender guidelines and a full file review.
“Adjustable first mortgage” can mean two different things. Your current loan might be the adjustable one, and the cash-out would pay it off. Or the new VA loan might be the adjustable one. The rules treat these differently, so this article takes each in turn.
What Does a VA Cash-Out Refinance Do to Your Adjustable Loan?
It replaces it. A cash-out refinance pays off your current first mortgage and puts one new VA-backed loan in its place. You end up with a single mortgage, not two. That is the main difference from a second lien such as a home equity line, which sits behind the first loan and leaves it in place.
Two things follow from that. You cannot keep your adjustable loan and add cash on top. The loan gets paid off as part of the deal. And the cash-out can refinance almost any kind of first mortgage into a VA loan: conventional, FHA, USDA, or an existing VA loan. Across the wholesale programs Lendmire places VA files with, that is the feature that sets the cash-out apart from the streamlined VA refinance.
VA’s cash-out page lists three conditions. You need a valid Certificate of Eligibility (COE). You must meet VA’s credit and income standards, along with the lender’s. And you must live in the home you are refinancing. Private lenders make VA loans. VA guarantees part of each one, which is why the loan can carry no mortgage insurance.
Lendmire’s VA cash-out refinance program page covers the program in general. This article stays on the adjustable-rate angle.
Key Terms Defined
Adjustable-rate mortgage (ARM): A loan whose interest rate can change after an initial period, which moves your monthly payment up or down.
Hybrid ARM: An ARM that stays fixed for a set number of years first, then begins adjusting.
Net tangible benefit (NTB): A test showing the new loan is in your financial interest. A VA cash-out must meet at least one of several listed benefits.
Type I cash-out: A refinance where the new loan, funding fee included, does not exceed the payoff of the loan being replaced.
Type II cash-out: A refinance where the new loan exceeds the payoff, which means you actually take cash home.
Recoupment: Earning back your refinance costs through lower regular monthly payments within 36 months. It applies to Type I loans.
Seasoning: The waiting period before an existing VA loan can be refinanced.
Residual income: What is left of your monthly income after your major obligations and living costs. It is the controlling test in VA underwriting.
Type I or Type II: Which One Are You?
The label depends on one comparison: the new loan against the payoff of the old one. VA Circular 26-19-05 draws the line. If the new loan, funding fee included, stays at or below the payoff, it is Type I. If it goes above the payoff, it is Type II.
Picture a homeowner whose ARM payoff roughly equals the new loan amount. That is Type I, and the point of the refinance is the loan itself, not the cash. Now picture a homeowner who wants extra money for repairs. The new loan is bigger than the payoff, so that is Type II.
The label matters because of recoupment. Under 38 CFR § 36.4306, a Type I loan must recover its fees and closing costs within 36 months through lower regular monthly payments. Taxes, escrow amounts and the VA funding fee are left out of that math. Type II loans do not carry the recoupment certification. The lender certifies recoupment to VA for Type I files before the guaranty is issued.
The Net Tangible Benefit Test When You Hold an ARM
If your current loan is an ARM and the new one is fixed, you have already met the test. The regulation lists eight possible benefits. One of them is refinancing an adjustable-rate mortgage into a fixed-rate loan. That conversion is reviewed on its own.
Other benefits on the list include:
- The new loan is at or below 90 percent of the home’s reasonable value.
- The new loan raises your monthly residual income.
- The new loan removes monthly mortgage insurance.
- The new loan has a shorter term.
- The new loan has a lower interest rate.
- The new loan refinances an interim construction, alteration or repair loan.
So ARM-to-fixed is one door, not the only one. A homeowner staying in an ARM, or moving from one ARM to another, has to show a different benefit.
One misconception deserves a straight answer. The conversion counts as a benefit whether or not your payment drops. A fixed loan can start with a higher payment than your ARM’s current one. What you buy is predictability. You should weigh that honestly before you sign.
How the VA Cash-Out Is Underwritten, Step by Step
Here is the path a file takes, based on how these loans move through the wholesale programs Lendmire works with.
1. Entitlement and occupancy. You need a COE, and the home must be your residence. If you are asking about a rental or second home, occupancy decides the leverage, and the VA cash-out is built for the home you live in.
2. Classification. The lender sorts the loan into Type I or Type II.
3. Benefit route. The lender picks the net tangible benefit. For an ARM holder moving to fixed, that is the conversion itself.
4. Full underwriting. A cash-out is not a streamline. Expect a full review of credit, income and debts.
5. VA appraisal. The appraised value sets the ceiling. The new loan, with the financed funding fee included, can reach 100% of that value. VA’s lender-call slides confirm that the fee counts toward the ceiling.
6. Seasoning, if the old loan is VA. More on that below.
7. Disclosure and closing. You receive a Loan Estimate and a Closing Disclosure as with any consumer mortgage. The lender also provides a loan comparison showing how the new loan differs from the old.
On credit, VA sets no minimum score. Lenders set their own. The wholesale programs Lendmire places VA loans with start at a 580 decision score, and some lenders set a higher floor. On debt, residual income is the controlling test. The 41% debt-to-income figure is a guideline, not a cap. A ratio above it needs residual income well above the table.
Does Seasoning Apply to Your ARM?
It applies when the loan being paid off is a VA loan. For VA-to-VA refinances, the cash-out carries the same seasoning as the streamlined refinance: the later of 210 days from the first payment and the sixth payment. A VA ARM you closed recently cannot be pulled into a cash-out right away.
Timing matters here. Suppose your VA ARM is nearing its first adjustment, but you have not made six payments. You may have to wait. A conventional or FHA ARM being refinanced into VA does not face this VA-to-VA seasoning, though lenders may still look at your recent payment history.
If a rate reset is coming, work backward from the reset date. Ask your loan officer to confirm the seasoning date from your note and payment record before you plan around it.
Can the New VA Loan Be Adjustable Too?
Yes, VA allows adjustable and hybrid adjustable products, and the choice is yours. The rules for qualifying are what change.
VA’s Federal Register rulemaking proposed a cushion for the traditional ARM. Under it, a loan that can adjust after only 12 months would be evaluated at a rate at least one percentage point above the starting rate. A hybrid, which stays fixed longer, would be evaluated at no less than its initial rate. The reasoning is simple. A traditional ARM can move soon, and a hybrid’s fixed period and caps soften the near-term risk. That document is a proposal, so confirm the final rule’s text with your loan officer before relying on specifics.
So the common belief that VA ARMs are always underwritten at the teaser rate is wrong. It depends on the type of ARM.
Lenders can also set tighter rules than VA does. Some cap cash-out loans below 100%, and some add rules for borrowers with higher debt ratios. Those are lender overlays, not VA rules.
The CFPB’s Consumer Handbook on Adjustable-Rate Mortgages gives the sober advice. The rate can start low and rise, and you should consider an ARM only if you could afford the payment at its highest possible level. It also explains the formula: an index plus a margin.
Fixed or Adjustable on the New Loan: A Decision Table
| Your situation | Likely leaning | What to check |
|---|---|---|
| Staying long term, want certainty | Fixed | Payment on day one |
| Selling within the fixed period | Hybrid ARM | Caps and reset date |
| Tight monthly budget | Fixed | Worst-case payment |
| Current ARM resetting soon | Fixed | Seasoning, if VA loan |
Treat this as a thinking aid, not advice. A hybrid ARM can make sense when you are sure of a move before the adjustment. A fixed loan suits a borrower who would be stressed by any increase.
Where the General Rule Breaks
IRRRL versus cash-out. The IRRRL is VA’s streamlined refinance for an existing VA loan. It can move you from adjustable to fixed with no VA appraisal and a 0.5% funding fee unless you are exempt. VA’s fact sheet says it can “stabilize your monthly payments by moving to a fixed-rate loan.” But it generally cannot put cash in your hands. If you hold a VA ARM and only want stability, the IRRRL may be the simpler route. If you want cash, or hold a non-VA ARM, the cash-out is the path.
Non-VA ARM into VA. A conventional or FHA ARM can become a VA loan through a cash-out. That is how a veteran with a non-VA ARM gets VA’s no-mortgage-insurance structure.
Construction loans. Refinancing an interim construction, alteration or repair loan is one of the eight benefits and falls under the cash-out rules.
Funding fee. It is reviewable and counts toward the 100% ceiling. For a cash-out refinance it is 2.15% on first use and 3.3% on later use. Veterans receiving compensation for a service-connected disability, and the other exempt groups, owe none. Whether the fee is financed also affects whether your loan is Type I or Type II.
Loan size. With full entitlement, there is no VA loan limit. With remaining entitlement, a down payment may be required, so speak with a loan officer.
A Worked Example With No Dollar Figures
Say you hold a non-VA hybrid ARM whose fixed period is ending. You have strong residual income and a score above the wholesale floor. You want to move to a fixed loan and take a modest amount of equity out.
Your loan is Type II because the new loan exceeds the payoff. The ARM-to-fixed conversion meets the net tangible benefit test. The appraisal sets the ceiling, and the new loan with the financed funding fee must stay at or under 100% of that value. Seasoning does not apply because the old loan is not VA. Underwriting then checks credit, income and residual income.
Now change one fact. Your old loan is a VA ARM closed recently. Seasoning could block the cash-out for now, and an IRRRL might be the alternative once its seasoning is met.
What to Gather Before You Apply
- Your Certificate of Eligibility.
- The ARM note and your latest rate-adjustment notice.
- A current payoff statement and 12 months of mortgage history.
- Income documents and a list of your debts.
Late payments on the old loan complicate a file. So does an upcoming reset you have not planned for. A payoff statement that is out of date can also hold things up.
What Do You Lose by Taking Cash Out?
Equity. A cash-out converts part of your ownership into debt. VA warns that closing costs can add up to thousands of dollars, and those costs may be built into the loan balance. Weigh that against any real benefit, and look at the Loan Estimate line by line. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
If you would rather keep a good first mortgage and borrow against equity another way, see Lendmire’s piece VA Cash-Out vs HELOC for Debt When the First Mortgage Is Worth Keeping.
Frequently Asked Questions
Is refinancing out of an ARM enough to qualify for a VA cash-out?
It meets the net tangible benefit test, but not every other requirement. You still need a COE, the home must be your residence, and credit, income and residual income are all reviewed. The loan must also stay within 100% of the appraised value, financed fee included.
Can I keep my adjustable loan and add cash on top?
No. A cash-out replaces the first mortgage. If you want to leave the ARM in place, a second lien is the different route, and it comes with its own terms.
Does VA set a minimum credit score?
No. VA sets no minimum, but lenders do. The wholesale programs Lendmire places VA loans with start at a 580 decision score, and some lenders require more. Subject to lender guidelines and full file review.
Is the 90 percent figure still the VA cash-out cap?
No. The ceiling is 100% of the appraised value, financed fee included. Ninety percent is now just one way to show a net tangible benefit. Some lenders set lower limits of their own.
Can an IRRRL pull cash out of my VA ARM?
Generally not. The IRRRL is built to lower a rate or move from adjustable to fixed on an existing VA loan. Cash proceeds require the cash-out.
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
Get Started
Ready to find the right loan for you?
In about 30 seconds you can review financing options available for your home or investment property. No commitment required.
Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. VA.gov: Cash-out refinance loan
4. VA: Aq42 Lender Call Jan2019
5. Federal Register: VA ARM and hybrid ARM proposal
6. CFPB Consumer Handbook on Adjustable-Rate Mortgages
This article is part of Lendmire’s VA Loans series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: VA Cash-Out vs Conventional for a Veteran Wanting the Most Cash · Does the Lender Matter for a VA Cash-Out on an Existing VA Loan? · VA Cash-Out vs Conventional Cash-Out When the Home Is Worth Far More
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.