The Quick Read: It depends on one comparison, and the answer is usually no if the closing costs are financed. VA sorts cash-out refinances by comparing the new loan amount, funding fee included, with the payoff of the loan being refinanced. If the new loan is at or below the payoff, it is a Type I. If financed closing costs push it above the payoff, it is a Type II. Either way, the loan runs through the VA cash-out program and gets full underwriting.
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: 7.40% as of October 15, 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.
That last point trips people up. Closing costs are not part of the payoff. So a refinance that “only” rolls in its own costs lands above the payoff by that amount. This is an inference from VA’s definitions, not a quoted VA ruling. The sections below show how the test works, where the exceptions sit, and what each path means for your budget and equity.
Why Does “Cash-Out” Mislead Here?
In everyday speech, cash-out means money in your hand at closing. In VA’s vocabulary, a cash-out refinance is any refinance that is not an IRRRL. You can receive zero dollars and still be in the cash-out program.
That is why a homeowner with a conventional or FHA loan, who wants a VA loan and no cash, ends up in the VA cash-out refinance program. The IRRRL, VA’s streamline, only refinances an existing VA loan. If your current loan is not a VA loan, the IRRRL is off the table.
How Does VA Decide Type I or Type II?
VA compares two numbers. VBA Circular 26-19-05 defines a Type I cash-out as a refinancing loan where the loan amount, including the VA funding fee, does not exceed the payoff of the loan being refinanced. A Type II is one where the amount, funding fee included, exceeds the payoff.
Think of it as a simple line:
- Payoff of the old loan, on one side.
- New loan amount (payoff plus anything financed plus the funding fee, if financed), on the other.
New amount at or below payoff: Type I. Above it: Type II.
VA’s own system makes the call. Per the VA quick reference for cash-out refinances, the system determines whether the new loan is a Type 1 or Type 2. The lender does not pick the label.
Here is the catch with the funding fee. It counts toward the new loan amount. A financed funding fee alone can push a loan above the payoff. Across the wholesale programs Lendmire places VA files with, the cash-out funding fee is 2.15% on first use and 3.3% on subsequent use, subject to lender guidelines. It is waived for veterans receiving compensation for a service-connected disability and the other exempt groups. So even a borrower who pays closing costs in cash may land in Type II if the fee is financed.
Three Ways the Same Refinance Can Land
| Scenario | Closing costs | New loan vs. payoff | Type |
|---|---|---|---|
| Costs paid in cash, fee exempt | Out of pocket | At payoff | Type I |
| Costs covered by a lender credit | Credit | At or below payoff | Type I |
| Costs and fee financed | In the loan | Above payoff | Type II |
The middle row has a trade-off. A lender credit is not free money. The cost is built into the loan’s terms. Lendmire does not quote those terms in articles, so ask for them on your Loan Estimate.
Run the logic on a borrower owing a given balance with a funding-fee exemption. If the closing costs are paid from savings, the new loan equals the payoff. Type I. If the same borrower finances those costs, the loan sits above the payoff. Type II. Same house, same lender, different label.
Does Type I vs. Type II Change Whether You Can Do the Loan?
Not by itself. Both types are cash-out loans under 38 CFR 36.4306. Both cap the new loan at 100 percent of reasonable value, funding fee included. Both need an appraisal, full underwriting, and a net tangible benefit.
The type changes the paperwork, and for VA-to-VA files, the extra tests. It also changes how much equity you have left afterward. A Type II leaves a larger balance, so less equity.
What Extra Tests Hit a VA-to-VA Type I?
Two additions. For a Type I that refinances an existing VA loan, VA’s quick reference lists a seasoning certification, a fee recoupment certification, at least one net tangible benefit, and initial and final cash-out disclosures.
Recoupment is the one that stops files. Under the regulation, all fees and incurred costs must be scheduled to be recouped on or before 36 months after the loan is issued, through lower regular monthly payments. Taxes, escrow amounts and VA funding fees are excluded from that comparison. A refinance that raises the payment struggles to pass it.
Seasoning is the second. Across the wholesale programs Lendmire works with, it is the later of 210 days from the first payment on the loan being refinanced and the 6th payment. That is the same seasoning the IRRRL carries.
For a non-VA loan going into VA as a Type I, VA’s listed requirements are at least one net tangible benefit plus the initial and final cash-out disclosures. The seasoning and recoupment certifications are listed only for the VA-to-VA path. Check your own file with a loan officer, since lenders may layer their own rules on top.
What Is the Net Tangible Benefit?
It is the proof that the refinance is in your financial interest. The regulation requires the loan to provide one, and the lender must give you the test. The listed conditions include eliminating monthly mortgage insurance, a shorter term, and a lower interest rate.
A conventional borrower dropping private mortgage insurance has an obvious one. VA loans carry no monthly mortgage insurance, so moving into a VA loan can meet the test on that ground.
How Does a Type I Compare to an IRRRL and a Type II?
| Factor | IRRRL | Type I cash-out | Type II cash-out |
|---|---|---|---|
| Current loan | VA only | VA or non-VA | VA or non-VA |
| Cash to borrower | None | None or minimal | Possible |
| New loan vs. payoff | Existing loan plus costs | At or below payoff | Above payoff |
| Appraisal | Generally none | Required | Required |
| Full underwriting | Generally none | Required | Required |
| Funding fee | 0.5% unless exempt | 2.15% first use, 3.3% after | Same as Type I |
The IRRRL is the one place where VA allows rolling in costs without a full file. Its proceeds go only to the existing VA loan and the costs of obtaining the IRRRL. It cannot take equity out or pay off other debts. If you hold a VA loan and only want a lower rate or a switch from adjustable to fixed, it is usually the simpler road.
What Does the Choice Do to Your Budget and Equity?
Type I can lower your payment if the new loan has a lower rate, a shorter term, or no mortgage insurance. Because the 36-month recoupment test is about payment savings, a Type I that raises your payment is hard to get through on a VA-to-VA file.
Paying closing costs in cash keeps you in Type I but needs cash on hand. Financing them puts you in Type II and adds to the balance. That is the real decision. One shows up as money out of pocket at closing. The other shows up as a bigger balance for years.
Full underwriting means your credit and income get reviewed again. Residual income is the controlling test on VA files, and the 41% debt-to-income figure is a guideline, not a cap. The wholesale programs Lendmire places with start at a 580 decision score. The appraisal also has to support the amount. The 100 percent ceiling is a maximum, not a target. Years ago the cash-out cap was 90 percent of value, a limit Congress set in 1989. The Federal Register notice on the 2018 law explains why VA created the Type I and Type II split and moved the cap to 100 percent.
If you are weighing this against a home equity line, Lendmire’s piece HELOC vs Cash-Out Refinance: Closing Costs, Loan Type and CLTV Limits covers the structural differences.
Key Terms Defined
Type I cash-out: A VA refinance where the new loan, funding fee included, does not exceed the payoff of the loan being refinanced.
Type II cash-out: A VA refinance where the new loan, funding fee included, is more than the payoff.
IRRRL: VA’s streamline refinance for an existing VA loan, with no VA appraisal, a 0.5% fee unless exempt, and a net tangible benefit.
Net tangible benefit: A test showing the refinance is in the borrower’s financial interest.
Recoupment: Scheduling fees and costs to be earned back through lower monthly payments within 36 months.
Reasonable value: The VA appraised value that sets the ceiling on the new loan.
Common Mistakes
- Assuming any no-cash refinance is an IRRRL. It is VA-to-VA only.
- Assuming Type I skips the appraisal or underwriting. A Type I refinance does not automatically skip either step.
- Treating financed closing costs as a no-cash-out loan. Under VA’s definition, the loan is above the payoff, so Type II.
- Forgetting the funding fee counts. Financed or not, it affects the comparison if rolled in.
- Assuming you need a VA loan today. A non-VA loan can be refinanced into VA through the cash-out program.
One more point on occupancy: the home is the borrower’s residence. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Frequently Asked Questions
Is a refinance that only covers closing costs a Type I?
Only if the new loan, funding fee included, stays at or below the payoff. Closing costs are not part of the payoff, so financing them lifts the loan above it, which makes it a Type II. Paying costs in cash, or covering them with a lender credit, can keep it Type I.
Does a Type I give me cash at closing?
No, not in the usual sense. Type I means the new loan does not exceed the payoff, so there is no equity cash to you. VA still calls it a cash-out refinance because it is not an IRRRL.
Can I roll closing costs into an IRRRL?
Yes, the IRRRL’s proceeds may go to the existing VA loan and the costs of obtaining or closing it. It only works if your current loan is a VA loan, and the 0.5% funding fee applies unless you are exempt.
Does it matter if my current loan isn’t VA?
Yes. An IRRRL is not available, so your no-cash refinance into VA runs through the cash-out program as a Type I unless financed closing costs push it above the payoff, in which case it is a Type II. The listed requirements are a net tangible benefit and the cash-out disclosures.
Will financing costs raise my balance and cut my equity?
Yes. A Type II leaves a larger loan balance than the payoff, and the funding fee does the same when financed. The new loan still cannot exceed 100 percent of the appraised value, and every figure is subject to lender guidelines and full file review.
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. Nothing here is a commitment to lend.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
2. VA Quick Reference Document for Cash-Out Refinances
4. Federal Register, VA cash-out interim final rule
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 Refinance Asset Income Verification for a Retiree · How to Apply for a VA Cash-Out Refinance Step by Step · How to Refinance Into a VA Cash-Out on a 2-4 Unit Primary Home
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.