The Quick Read: Usually only when you need the cash. Type II means the new loan is bigger than the payoff, so money comes out of your equity. Type I pays you nothing and only changes the loan itself. Both types must show a net tangible benefit, so “worth it” comes down to what the cash is for.
What’s the Real Difference Between Type I and Type II?
The real difference is whether you walk away with cash. Type I replaces your old loan with a new one that does not exceed the payoff. Type II replaces it with a bigger one, and you receive the difference. Everything else follows from that.
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: 7.32% as of October 22, 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.
Here is the side-by-side, in plain terms.
| Factor | Type I | Type II |
|---|---|---|
| New loan vs. payoff | At or under payoff | Over payoff |
| Cash to you | None | Yes, from equity |
| Extra tests | Benefit test, plus recoupment and seasoning (VA-to-VA) | Benefit test, plus seasoning (VA-to-VA) |
| Typical goal | Change the loan, not the balance | Fund a specific cash need |
| Main trade-off | Fewer uses | More debt, less equity |
Lendmire arranges loans under the VA cash-out refinance program through wholesale lenders, and the Type I versus Type II question comes up on a large share of those conversations. The honest answer is that neither type is “better.” They are tools for different jobs.
One more fact frames the whole decision. The VA cash-out reaches up to 100% of the appraised value, including the financed funding fee. It refinances any loan type into a VA loan. That ceiling is generous. Whether you should use it is a separate question.
How Does VA Decide Which Type You Have?
VA sorts the loan by comparing two numbers: the payoff of the loan being replaced and the new loan amount. VA’s lender guidance defines Type I as a new loan that does not exceed the payoff and Type II as one that does. You do not pick the label. The numbers do.
That creates a boundary worth knowing about. Say you want a pure rate-and-term refinance and no cash. If you also finance the funding fee and closing costs, the new balance can land above the old payoff. Technically, that makes it a Type II. You asked for no cash and got a Type II anyway.
The fix is not complicated. Pay some costs out of pocket, or ask your loan officer to show you both versions before you commit. The lender’s system calculates the type, but the structure of the request is yours to shape.
Appraisal comes first in either case. The appraiser sets the reasonable value, and the lender divides the total new loan, financed fee included, by that value. VA Circular 26-19-05 says VA will not guaranty a refinance when the result tops 100%. A low appraisal can shrink your cash or end the Type II plan entirely.
When Is Type II Worth It?
Type II is worth it when the cash has a real job and the new loan still passes the benefit test. Paying off high-balance debt, funding a major repair, or covering a large one-time expense are the usual jobs. Cash with no plan is just a bigger mortgage.
Picture a homeowner with a VA loan and a roof that needs replacing. The alternative is putting it on a credit card. Type II folds that cost into the mortgage, which can make sense if the loan still passes the benefit test. Likewise, a borrower carrying heavy unsecured debt may want to roll it into one VA loan.
Notice the pattern. In both cases, the cash replaces something that costs more or hurts more. That is the test to run on yourself:
- Does this cash pay off something with a worse cost than the mortgage?
- Does it add lasting value to the home?
- Will I still have meaningful equity after the loan closes?
If you answer yes twice, Type II deserves a closer look. If you answer no to the first two, the cash probably is not worth the trade.
Paying off a second lien, such as a home equity line, is its own sub-question. Lendmire’s piece Is a VA Cash-Out Type II When It Pays Off an Existing HELOC? walks through it.
When Does Type I (or Something Else) Win?
Type I wins when you want to change the loan without taking equity out. Moving out of an FHA or conventional loan into VA terms is the clearest case. So is shortening the term, switching an adjustable loan to fixed, or dropping monthly mortgage insurance. In each, you improve the loan and keep your equity.
Here is a detail many borrowers miss. The strictest Type I tests apply to loans refinancing an existing VA loan. The National Consumer Law Center’s comments on the VA rule note that weaker standards apply when the loan being refinanced is not a VA loan, although at least one benefit is still required. So a borrower leaving an FHA or conventional loan often has the easiest path.
If you already hold a VA loan and only want a lower rate or a switch from adjustable to fixed, the IRRRL is another option. It refinances an existing VA loan with no VA appraisal, carries a 0.5% fee unless you are exempt, and requires a net tangible benefit and seasoning. It does not pay you cash.
Skip Type II if the only reason is “the equity is there.” It is there next year too.
What Does the Cash Actually Cost You?
The cash costs you equity, a bigger balance, and the funding fee. Every dollar you take out is new debt. Because the new loan can reach 100% of appraised value, a Type II can leave you with almost no cushion if home values slip.
Think about the cushion first. A homeowner who borrows to the ceiling owes the full appraised value on day one. If the market dips, they may owe more than the home is worth. That does not matter until you need to sell or refinance. Then it matters a great deal.
The funding fee is the second cost. On a cash-out refinance, it runs 2.15% for first use and 3.3% for subsequent use. It is waived for veterans receiving compensation for a service-connected disability and for the other exempt groups. You can finance it, but financing it adds to the balance and shrinks the cash you receive.
There is a rule on this. Under 38 CFR 36.4306, any part of the funding fee that would push the loan above 100% of reasonable value must be paid in cash at closing. You cannot borrow past the ceiling just to cover the fee.
Third, the payment. A Type II loan is larger than the payoff, so the monthly payment is usually higher than a Type I at the same terms. Your lender will show the actual figures on the Loan Estimate. Compare the full monthly cost on both loans, taxes and insurance included, not just principal and interest.
One more point. VA does not publish a minimum credit score. Each lender sets its own floor, and some set it higher than others. The wholesale programs Lendmire places VA loans with start at a 580 decision score. Residual income, meaning what is left after your major monthly obligations and living costs, is the controlling test. The 41% debt-to-income figure is a guideline, not a cap. A ratio above it simply needs residual income well above the table.
What Tests Does a Type II Have to Pass?
A Type II must pass a net tangible benefit test, a seasoning check when you are refinancing a VA loan, full credit and income underwriting, and a full appraisal. It does not face the recoupment test that Type I carries on VA-to-VA files.
Net tangible benefit. The new loan must meet at least one of eight benefits listed in the regulation. Examples include eliminating monthly mortgage insurance, a shorter term, paying off an interim construction or repair loan, converting an adjustable-rate loan to fixed, or a new loan at or below 90% of reasonable value. VA’s 2023 lender conference slides confirm that cash-out loans must meet one of those items.
Taking cash usually raises your balance. That makes the benefit test harder, not easier. The remaining routes, such as a shorter term, a loan at or below 90% of value, or removing mortgage insurance, depend on your actual numbers. This is where a loan officer earns the fee.
Seasoning. When you refinance an existing VA loan, you must wait. The standard is the later of 210 days from your first payment and your sixth payment. Type I VA-to-VA files add a recoupment test: the fees and charges must be recovered within 36 months, per the same VA slides.
Disclosure. The lender must give you a comparison of the old and new loans. It covers payoff amount, loan type, interest rate, term and other items. Read it. It is the clearest view you get of what you are trading.
Underwriting. VA guarantees the loan, but the lender underwrites it. Expect a full credit and income review and a full appraisal. Everything above is subject to lender guidelines and full file review, and none of it is a commitment to lend.
A Quick Scenario: Same Homeowner, Two Paths
Picture a veteran with a VA loan well past seasoning. The home appraises at a value where the current payoff is about 55% of it. She has two goals: replace a failing roof and pay off a pile of card balances.
Path one, Type I. She asks only for a shorter term. The new loan matches the old payoff, with the fee and costs handled carefully so the balance does not climb past it. She gets no cash. The roof and the cards stay on her to-do list. Her equity stays untouched.
Path two, Type II. She takes cash for the roof and the cards, financing the funding fee. Her loan balance rises. Her equity drops. But her high-cost debts are gone, and she has one payment to manage.
Which is better? Honestly, it is a close call. If the cards carry a punishing cost and the roof cannot wait, Type II is the stronger play. If the roof can wait and the cards are modest, she may do better with Type I now and a smaller, separate fix later. The right answer depends on how the new payment compares with her current obligations once the roof and cards are accounted for. That is the math the comparison disclosure forces into the open.
Mistakes and Myths That Cost Veterans Money
The most expensive mistake is judging a refinance by its monthly payment alone. A lower payment can hide a longer term, a bigger balance, or a comparison that was not apples to apples. Here are the myths worth dropping.
“Type II skips the benefit test.” False. Circular 26-19-05 says the net tangible benefit standards apply to all cash-out refinancing loans.
“A lower payment means a better deal.” Not always. The CFPB’s order against a VA refinance lender found that its marketing compared the new loan’s principal and interest to the old loan’s full payment, which included taxes and insurance. That made the savings look bigger than they were. The lender paid a civil penalty. Always compare like with like.
“Too-good-to-be-true offers are real.” The CFPB and VA jointly warned about mailers promising extremely low rates, cash back, skipped payments, no out-of-pocket costs and no waiting period. Those claims deserve a hard look.
“My escrow refund is free cash.” The same warning notes that the refund depends on what is left in the account at closing. It is not a bonus you can count on.
“VA lets me borrow 100% plus the funding fee.” Not anymore. The financed fee cannot push the loan above 100% of reasonable value.
“Any lender will give me the full 100%.” Some lenders set limits below the VA ceiling. The program allows 100%. Your lender’s overlay may not.
Key Terms Defined
Type I refinance: A VA cash-out refinance where the new loan does not exceed the payoff of the loan being replaced. You get no cash.
Type II refinance: A VA cash-out refinance where the new loan exceeds the payoff. The difference comes to you as cash.
Net tangible benefit: A test showing the new loan helps you in a concrete way, such as a shorter term or removing mortgage insurance.
Seasoning: The waiting period between your old loan’s first payments and a refinance. For a VA loan, it is the later of 210 days from the first payment and the sixth payment.
Recoupment: Earning back the refinance fees and charges through lower payments. For Type I VA-to-VA refinances, VA expects this within 36 months.
Funding fee: A VA charge on the loan that can be financed. It is waived for veterans receiving compensation for a service-connected disability and the other exempt groups.
Residual income: What is left of your monthly income after major obligations and living costs. It is the controlling VA underwriting test.
A Short Self-Check Before You Apply
Before you ask for a Type II, run through these questions.
1. What exactly will the cash pay for, and does it cost less than the mortgage debt it replaces? 2. Is my existing loan VA or non-VA? That changes which tests apply. 3. Have I met the seasoning period if my current loan is VA? 4. Which of the net tangible benefits will the new loan meet? 5. How much equity will I have left at 100% of appraised value? 6. Have I compared the full monthly cost, taxes and insurance included, old versus new?
If a question stumps you, that is the one to bring to your loan officer.
Frequently Asked Questions
Can I take just a little cash out?
Yes. Type II has no required minimum. Any new loan amount above the payoff makes it a Type II, and a small amount of cash still triggers the same tests and the funding fee. A modest cash need is often better handled another way, so compare before you commit.
Can I use Type II to pay off a non-VA loan and a second lien?
Often yes. A cash-out refinance can convert any loan type into a VA loan, and the proceeds can retire a first mortgage and a second lien together. The new loan must still stay within 100% of appraised value, including the financed fee, and pass the benefit test. Subject to lender guidelines and full file review.
What happens if my appraisal comes in low?
Your cash shrinks, or the Type II becomes unworkable. The 100% ceiling is measured against the appraised value, so a lower value cuts the maximum loan. You may be able to take less cash, pay costs out of pocket, or pause until values support the plan.
Does Type II avoid the recoupment test?
On VA-to-VA files, VA’s materials place the recoupment test on Type I, not Type II. Type II still has to meet the net tangible benefit test, though. Your lender will confirm which tests apply to your file.
Is the funding fee different for Type II?
The cash-out fee is 2.15% for first use and 3.3% for subsequent use, and it is waived for exempt borrowers. It can be financed, but any part that pushes the loan past 100% of reasonable value must be paid in cash at closing.
Your Next Step
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. Bring your current payoff, your goal for the cash, and your questions about the home you live in. A side-by-side of Type I and Type II on your own numbers settles the debate better than any rule of thumb.
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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References
5. VA Loan Guaranty Conference, Refinancing Loans
6. CFPB order on misleading VA cash-out refinance marketing
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: How to Refinance an Existing VA Loan After a Divorce or Inheritance · How Much a VA Loan Refinance Costs to Close and Roll In · Can a Veteran Get Cash Out With a VA IRRRL Streamline?
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.