The Quick Read: The funding fee rolls into the new loan balance, and the total, fee included, cannot pass 100% of the appraised value. The catch for a paid-off home is that VA’s handbook says a refinance needs an existing mortgage or lien of record to be guaranteed. A home with no lien at all generally cannot take a VA cash-out. When a lien does exist, the fee is financed on top of the payoff and the cash you receive shrinks by that amount.
What Does “Paid-Off” Mean for a VA Cash-Out?
Most veterans who search this topic own a home with no mortgage and want to pull equity out through the VA program. The mechanics of the fee are simple. The eligibility premise is the part that trips people up.
VA cash-out estimate
Seeded with an example value, a typical balance, and a round cash request at the first-use fee; change any field.
Editable benchmark: 7.18% as of November 5, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a VA cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the full-value VA cap with the first-use funding fee financed, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a VA cash-out refinance quote; a VA loan is priced by the lender at lock. The total loan, funding fee included, is capped at the program leverage on the reasonable value; the fee follows the tier chosen. The cash available is what the cap allows less the balances paid off and the fee, before closing costs, which are not included. The HELOC line is the line program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. The debt-to-income figure is a guideline; residual income decides a VA file. Licensed in sixteen states for consumer mortgages.
VA’s Lenders Handbook defines a cash-out refinance as a refinance of existing mortgages or other debt secured by a lien of record. The VA Lenders Handbook, Chapter 6 says a refinance on a property with no mortgage or lien of record is not eligible for the VA guaranty. No lien, no guaranty.
Here is the practical read:
- A home free and clear, with nothing recorded against it, is not a candidate for the VA cash-out.
- A home with any recorded lien can be. That includes a non-VA mortgage, a HELOC, a second mortgage, or a tax or contractor lien.
- The lien does not have to be in the veteran’s name, per the same handbook chapter.
So the useful version of the question is how the fee behaves when a lien exists, however small. For the lender side of the program, see Lendmire’s VA cash-out refinance program page.
Key Terms Defined
Funding fee: A one-time VA charge, set as a percentage of the loan, that can be added to the loan amount. It is waived for exempt veterans.
Lien of record: A legal claim against the property that is recorded in public records, such as a mortgage, HELOC or judgment.
Reasonable value: The appraised value VA assigns to the home. It sets the ceiling on the new loan.
Entitlement: The portion of the VA benefit available to guarantee a loan. A certificate of eligibility (COE) shows it.
Net tangible benefit: A test showing the new loan puts the borrower in a better financial position in a way VA recognizes.
Residual income: What is left of monthly income after taxes, debts and housing costs. It is the controlling VA underwriting test.
How the Funding Fee Is Set
The fee depends on the loan type and on whether you have used the benefit before. Across the wholesale programs Lendmire places VA files with, the cash-out figures are:
- 2.15% on first use.
- 3.3% on subsequent use.
“Subsequent use” means you used a VA loan before, even if you sold that home or paid the mortgage off. Down payment tiers (1.5% and 1.25%) apply to purchases only. A refinance has no down payment, so a bigger “down payment” does not trim a cash-out fee. The IRRRL, which is a different product, carries 0.5%.
Veterans receiving compensation for a service-connected disability are exempt, along with the other exempt groups VA lists. Exemption turns on receiving or being entitled to compensation, not on the rating percentage. Confirm your status and the current rates on VA’s funding fee page. An exempt borrower has no funding fee to finance.
How Does the Fee Roll Into the Loan, Step by Step?
The fee is a percentage of the new loan, and it is part of that loan. Think of it as one more item the loan has to cover. Here is the order a file follows.
1. Certificate of eligibility. The certificate of eligibility (COE) shows the lender your entitlement and prior use. Prior use decides which fee tier applies.
2. Appraisal. The lender orders it. VA’s reasonable value becomes the ceiling. The new loan, fee included, cannot exceed 100% of that value. There is no VA dollar loan limit for borrowers with full entitlement.
3. Payoff of liens. Everything recorded against the home gets paid first. This is the step a free-and-clear home cannot supply.
4. Fee and costs. The funding fee is added to the loan. Allowable closing costs can also be paid from proceeds, which lowers the cash due at closing but also reduces the cash you walk away with.
5. Net cash. What is left after the payoff, the fee and any costs paid from proceeds is what reaches the borrower.
6. Benefit test and comparison. The lender must run the net tangible benefit test, give you a comparison of the old and new loans, and include a statement on how refinancing affects your equity. Those requirements come from 38 CFR 36.4306.
7. Full underwriting. A cash-out is not a streamline. Credit, income and residual income are all reviewed. Across the wholesale programs Lendmire places VA loans with, the decision-score floor starts at 580, subject to lender guidelines and full file review.
Because the fee is a percentage of a loan that already includes the fee, the two numbers depend on each other. You do not need to solve that by hand. The lender’s disclosures show the final figures.
Type I and Type II: Where the Ceiling Bites
VA sorts cash-outs by how the new loan compares to the payoff, and the fee is counted in that comparison.
| Factor | Type I | Type II |
|---|---|---|
| New loan vs payoff | At or below payoff | Above payoff |
| Fee counted in loan | Yes | Yes |
| Cash to borrower | Little or none | Yes, from the excess |
A Type I loan, per VA’s description, does not exceed the payoff including the fee. A Type II loan does exceed it, and that excess is where a borrower’s cash comes from.
Now apply that to the ceiling. When the value ceiling is not the limiting factor, the fee is simply added and the cash is the excess minus fee and costs. When the ceiling is binding, meaning you are borrowing to the full 100%, every point of fee comes straight out of your cash. The fee does not sit on top of 100%. It sits inside it.
What Financing the Fee Does to the Borrower
Financing the fee means you pay nothing for it at closing. It does not mean the fee is free. It joins the balance, accrues interest, and slightly raises the payment and the total interest over the life of the loan. VA News makes the same point about cash-outs generally: adding cash to the loan raises the balance and the interest paid over time.
| Choice | Cash at closing | Loan balance | Lifetime interest |
|---|---|---|---|
| Pay fee in cash | Higher | Lower | Lower |
| Finance the fee | Lower | Higher | Higher |
Two other effects matter:
- Debt-to-income and residual income. A larger balance raises the monthly obligation. VA treats 41% as a guideline, not a cap, and a higher ratio needs residual income well above the table.
- No monthly mortgage insurance. VA loans carry none. The funding fee is the one-time cost, and eliminating monthly mortgage insurance is one of the benefits the net tangible benefit rule recognizes.
The CFPB notes in its home equity guide that a cash-out refinance can extend the time it takes to pay off a mortgage. That is worth weighing if you are close to owning outright.
Where the General Rule Breaks
No lien of record. Not guaranteeable, as covered above. A lien-free borrower who wants equity has other tools, such as a home equity loan or HELOC. Those are new liens on the home, and they leave any first mortgage in place. A cash-out refinance replaces the first mortgage. The CFPB’s research blog on cash-out refinances draws that distinction.
Small or odd liens. A HELOC with a zero balance but a recorded lien, a second mortgage, or a recorded tax or contractor lien can all count as a lien of record. Whether a specific recorded item satisfies the lender and VA is a title question. Treat it as one to verify, not one to assume.
Paying off a HELOC. A cash-out can pay any type of lien. An IRRRL cannot. IRRRL proceeds only retire the existing VA loan and the costs of the IRRRL.
Non-VA loan into VA. A conventional or FHA loan can be refinanced into a VA loan through a cash-out. That is a common use even when no cash is taken.
VA-to-VA seasoning. Refinancing an existing VA loan carries seasoning: the later of 210 days from the first payment and the sixth payment. The half-percent rate-reduction and fee-recoupment tests are IRRRL rules and do not apply to the VA cash-out.
Occupancy. The home must be one you or a spouse or dependent will live in. It is not an investment property. If you are asking about a rental, occupancy decides the leverage, and the VA cash-out is built for a primary residence.
State law. Some states restrict cash-out refinancing. Local rules can change what a lender can do.
Entitlement. Using the benefit on a refinance ties up entitlement. With remaining entitlement instead of full entitlement, a down payment may apply on a later purchase, and a loan officer can walk through the specifics.
What Is the Decision in Practice?
For a veteran with a recorded lien, the choice comes down to a few questions.
- Is there a lien to refinance? If not, the VA cash-out is off the table.
- Are you fee-exempt? If yes, the fee question disappears.
- Is the ceiling binding? If you want every dollar of equity, the fee comes out of cash. If you want less, it comes out of room you were not using.
- Pay or finance? Financing preserves cash. Paying keeps the balance lower.
- Does the loan pass the net tangible benefit test? The lender must show it does.
Beware of aggressive refinance offers. VA itself warns veterans to be careful with them, so compare the Loan Estimate and Closing Disclosure side by side and ask what each line is.
If you are weighing a cash-out refinance on a home you own outright, Lendmire can help you compare the programs and the equity each one reaches. Lendmire is a mortgage broker and arranges loans through wholesale lenders. Figures here are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Frequently Asked Questions
Can I do a VA cash-out if my house is completely paid off?
Generally no. VA’s handbook says a refinance with no mortgage or lien of record is not eligible for the guaranty. If anything is recorded against the home, including a HELOC or a lien in someone else’s name, the picture can change, and a lender’s title review settles it.
Does the funding fee count against the 100% limit?
Yes. The new loan, fee included, cannot exceed 100% of the appraised value. When you borrow to the full limit, the fee reduces your cash dollar for dollar.
Can I pay the fee in cash instead of financing it?
Yes. Paying in cash keeps the loan balance and lifetime interest lower. Financing keeps more cash in your pocket at closing. A fee that cannot fit under the value ceiling has to be paid in cash.
Does a larger down payment lower the cash-out fee?
No. A refinance has no down payment, so the cash-out fee turns only on first or subsequent use. The tiers that drop with down payment apply to purchases.
Who does not pay the funding fee?
Veterans receiving compensation for a service-connected disability, along with other groups VA lists, such as certain surviving spouses and qualifying Purple Heart recipients. Exemption depends on receiving or being entitled to compensation, not the rating percentage. Confirm it on your COE.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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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 Lenders Handbook, Chapter 6: Refinancing Loans
2. VA.gov: Funding fee and closing costs
3. 38 CFR 36.4306, Cornell LII
4. VA News: You could be losing thousands on your home loan
5. CFPB: Using home equity to meet financial needs
6. CFPB Office of Research – Cash-out refinances 2013–2023
This article is part of Lendmire’s VA cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Can You Remove a Co-Borrower With a VA Cash-Out Refinance? · VA Cash-Out Refinance Requirements on a Home With No Mortgage · VA Cash-Out Refinance Requirements to Buy Another Home With Your Equity
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.