The Quick Read: A VA cash-out refinance replaces your first mortgage with one new VA-backed loan. At closing, the title company uses that loan to pay off the first mortgage and the private second, and any money left over comes to you. Both old liens are released, so you end up with one loan and one payment. The appraisal caps the total at 100% of the home’s value, and the financed funding fee counts toward that cap.
Key Takeaways
- A VA cash-out can pay off almost any recorded lien, including a second held by a private person or company.
- The new VA loan sits in first position, so the second must be paid off at closing, not left in place.
- The first mortgage’s terms change too. You are not just deleting the second.
- The appraised value sets the ceiling on payoffs, costs, the funding fee, and cash back combined.
- A streamline (IRRRL) cannot clear a private second. It only refinances an existing VA loan.
What a Private Second Actually Is
A private second is a loan secured by your home that sits behind your first mortgage and comes from someone other than a bank. It might be a seller-carried note, a loan from a family member who recorded a lien, or a loan from a private lending company.
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.
A “junior lien” is any lien that ranks behind the first mortgage. If the home is sold or foreclosed, the first gets paid first. The second gets what is left.
Private seconds look different from a bank HELOC. The holder may be one person, with no payment portal and no call center. Terms may be written on a short note. Payoff letters can take some chasing. That last part matters, and it gets its own section below.
Why a Cash-Out Replaces the First Instead of Adding a Lien
VA does not make a “second mortgage” product. A new VA loan must be the first lien on the home. So the only way to bring a VA loan into the picture is to pay off the liens ahead of it and replace them.
VA’s own consumer page describes the cash-out as replacing your current loan with a new one on different terms. It lists two uses: taking cash out of your equity, and refinancing a non-VA loan into a VA-backed loan. You apply through a private lender, not through VA.
Here is what that means in practice:
- Your old first mortgage ends, even if its terms were fine.
- The private second ends.
- One new VA loan takes first position.
- Your new loan’s terms apply to the whole balance.
Lendmire’s VA cash-out refinance program page covers the program basics.
The first mortgage does not have to be a VA loan. A cash-out can move an FHA, USDA, or conventional first into VA while it clears the second. That is a real draw for homeowners who stacked a first and a second to buy and now want one VA loan.
Closing-Day Payoff Order
The order of payment is simple. The new loan funds, and the title company pays everyone in sequence.
1. The first mortgage is paid off using its payoff statement.
2. The private second is paid off using its own payoff statement.
3. Closing costs and any unpaid fees come next.
4. Any remainder goes to you. That remainder is the cash-out.
Each payoff statement shows the exact amount owed on a given day, including per-diem interest. “Per diem” just means daily interest that keeps adding until the payoff lands. A private holder’s statement controls what is owed. Whatever the note says about early payoff is a conversation to have with the holder before closing, not a surprise to find at the table.
After payment, the holder releases the lien. The release gets recorded in the county records. Your title company tracks this, and the file is not clean until the release is done.
The second holder does not need to agree to be paid. A payoff needs a payoff letter, not consent. Consent (called subordination) matters only when a second stays in place behind a new first. A VA cash-out is not built that way, so the second has to go.
Type I or Type II: Which One Is This?
VA sorts cash-outs into two types. VA Circular 26-18-30 defines them, and the loan-to-value (LTV) ratio is the total new loan, including the funding fee, divided by the reasonable value.
- Type I: The new loan, funding fee included, does not exceed the payoff of the loans being refinanced.
- Type II: The new loan, funding fee included, is more than that payoff.
Here is the part that trips people up. The payoff counts the first and the second together. So paying off a second with no cash back can still be Type I, as long as the financed funding fee and costs fit within those payoffs.
If the new loan grows past the combined payoffs, the loan is a Type II. Cash back does this, because the extra amount borrowed goes to you.
One more point. Even a Type I with no cash back is still called a cash-out. VA treats any refinance that pays off a lien other than the VA loan itself as a cash-out.
A Worked Example
Run the numbers on a home that appraises at 100% of value. These are modeled assumptions, not market data. The first mortgage payoff is 60% of value. The private second is 15%. Closing costs plus the financed funding fee come to 5% of value, so the payoffs and costs together total 80%.
| Item (share of appraised value) | Scenario A | Scenario B |
|---|---|---|
| First mortgage payoff | 60% | 60% |
| Private second payoff | 15% | 15% |
| Costs and funding fee | 5% | 5% |
| Cash back to you | 0% | 10% |
| New loan amount | 80% | 90% |
Scenario A pays off both liens and covers costs. You get no cash, but you end up with one loan instead of two. Scenario B borrows more and takes 10% of value in cash, so the new loan is the 80% from Scenario A plus that 10%, or 90%. Both stay under the 100% ceiling.
The funding fee for a VA cash-out refinance is 2.15% on first use and 3.3% on later use, for borrowers who are not exempt. It is waived for veterans receiving compensation for a service-connected disability and the other exempt groups. Because it can be financed, it rides inside the new loan.
When the Payoffs Run Into the Appraisal Cap
Say the first and the second together eat most of the home’s value. Add costs and the fee and the total can bump into 100%. Now what?
You have a few paths:
- Pay the shortfall in cash at closing, if you have it.
- Negotiate the second’s payoff, if the holder is willing to accept less than the full balance. Some private holders will. Many will not.
- Wait and let the value or the balances move, or look at a different structure.
- Ask whether a lender will use a different appraisal approach. A low appraisal is a real obstacle, and the appraised value sets the ceiling.
Some lenders also set their own LTV caps below 100%. VA does not require that. It is the lender’s choice. Across the wholesale programs Lendmire places VA files with, the cash-out reaches 100% of the appraised value including the financed fee, subject to lender guidelines and full file review.
Pay Off, Keep, or Wait?
You have three real options when you own a home with a private second. This table lays out the tradeoffs.
| Option | What happens | Best when |
|---|---|---|
| Pay it off with a VA cash-out | Both liens end; one new first loan | The second is costly or awkward to keep |
| Keep it and leave the first alone | Second and current first both stay as they are | The current first’s terms are worth keeping |
| Wait | Nothing changes yet | Seasoning, value, or credit needs work |
Keeping the second in place behind a new first would require the holder to agree to stay behind it. That agreement is called subordination. Private holders can be slow, or they can say no. A VA cash-out is not built that way, so paying the second off avoids the problem. It also means refinancing the first, so ask whether the first’s current terms are worth losing.
A streamline refinance (IRRRL) is the usual VA tool for lowering the cost of an existing VA loan. The IRRRL must replace the existing VA loan as the first lien. VA also says you may not receive cash from the loan proceeds. So an IRRRL cannot pay off a second to clear it. If the second has to go, a cash-out is the VA path.
The Test Your Loan Must Pass
VA wants the new loan to be in your financial interest. The rule calls this the net tangible benefit test. The lender runs it, and the loan has to pass.
The test is met when the new loan satisfies at least one of VA’s listed benefits. Examples include:
- Eliminating monthly mortgage insurance on the old loan.
- Moving to a shorter term.
- Lowering the monthly payment.
- Raising your monthly residual income.
- Keeping the LTV at 90% or less. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
Merging two payments into one often does the job, since a second lien usually carries its own payment. Whether the combined payment drops depends on the new loan’s terms, not on the fact that there is one payment instead of two. A longer term can lower the monthly bill while raising the total interest you pay over time. Look at both.
The lender must give you the net tangible benefit information early in the process and again at closing. The same circular also requires disclosures about how the loan affects your equity. Read them. Equity is what you are converting, and a 100% loan leaves none behind.
Underwriting: Residual Income Does the Heavy Lifting
A VA cash-out is fully underwritten. That means credit, income, and residual income all get reviewed. The Federal Register notice behind the current rule says ability to repay must be shown. It also records the move of the cash-out cap from 90% to 100% of reasonable value.
Residual income is the money left each month after taxes, housing costs, and debts. VA’s table sets how much you need based on family size and region. It 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.
On credit, VA itself sets no minimum score. The wholesale programs Lendmire places VA loans with start at a 580 decision score. Individual lenders may set higher floors. Everything here is subject to lender guidelines.
You also need a Certificate of Eligibility (COE) from VA. Service requirements are VA’s rules, and the COE settles them. Because VA loans are for a primary home, you must plan to live in the property. Lenders will ask.
If you used part of your entitlement before, you may need to restore it or use what remains. Ask a loan officer how that applies to your file. Do not guess.
Dealing with a Slow or Quiet Private Holder
This is where a private second can slow a file down. A bank has a payoff department. A private holder may not.
- Find the note and the recorded lien. Get copies of both. The payoff statement has to match them.
- Send a written payoff request as soon as the lender asks. Include the loan number, your address, and a date.
- Ask for the per-diem figure so the amount can be updated if closing shifts.
- Ask where the payoff should be sent, and confirm it by phone. Wire fraud is real, and a private holder’s instructions deserve a second check.
- Ask for a signed release to be recorded once the payoff lands.
- Tell your loan officer early if the holder is slow. Do not wait for the last step.
If the holder never answers, the title company may have options, but those depend on your state and the facts. Work with your loan officer and your title company, and consider legal advice for tough cases.
Key Terms Defined
Cash-out refinance: A new loan that replaces your current loan and pays off other liens, with any leftover money going to you.
Junior lien: A lien that ranks behind your first mortgage when the home is sold or foreclosed.
Subordination: A written agreement where a lien holder agrees to stay behind a new first mortgage.
Reasonable value: The value VA sets on its appraisal notice. It caps how much you can borrow.
Net tangible benefit: VA’s test that the new loan helps you in at least one listed way.
Residual income: The money left each month after taxes, housing costs, and debts.
Funding fee: A one-time VA charge, financeable, and waived for exempt veterans.
Watch Out for Offers That Sound Too Good
VA says it never emails or mails refinance solicitations. If a mailer claims to be “from VA,” it is not. Compare lenders by the Loan Estimate, not by the headline.
Terms like “no-cost” and “skip a payment” describe how costs are packaged. The costs get built into the rate or the balance. They do not disappear. A cash-out that adds a funding fee and closing costs to the balance has a bigger balance, and you pay interest on it.
Frequently Asked Questions
Can a VA cash-out pay off a second mortgage held by a private lender?
Yes. VA’s rules let a cash-out pay off any recorded lien against the property, and a second mortgage is named. The holder does not need to be a bank. The payoff statement shows what is owed, and the title company pays it at closing.
Does paying off the second mean I am taking cash out?
Not necessarily. If the new loan, funding fee included, stays at or below the payoff of the old liens, it can be a Type I and you get no cash. VA still calls it a cash-out refinance, because it pays off a lien other than the VA loan.
Can a streamline refinance remove my private second?
No. The IRRRL can only refinance an existing VA loan, and it cannot return cash. A private second would stay in place behind it. Clearing it takes a cash-out.
Does the second holder have to agree to be paid off?
No. A payoff needs a payoff statement and a lien release. Agreement, called subordination, matters when the second stays behind a new first. It is not part of a standard cash-out payoff.
What limits how much I can borrow?
The appraised value. The new loan, funding fee included, cannot go past 100% of reasonable value. Any amount of the funding fee that would push the loan over that limit has to be paid in cash at closing. Lenders may also set lower caps of their own, subject to their guidelines.
What This Looks Like in Practice
The decision comes down to a few questions. Does one VA loan beat your current first and your second together? Do the payoffs, costs, and the funding fee fit under the appraised value? Does the new loan pass the net tangible benefit test? And does residual income support it?
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. Program figures are subject to lender guidelines and full file review. This is not a commitment to lend.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. 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.gov: Cash-out refinance loan
3. VA.gov: Interest Rate Reduction Refinance Loan (IRRRL)
4. Federal Register: Revisions to VA Cash-Out Refinance Loans
5. VA News, misleading advertising
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 Entitlement Works on a VA Cash-Out Refinance With a New COE · Can You Remove a Co-Borrower With a VA Cash-Out Refinance? · How a VA Jumbo Cash-Out Counts Your Remaining Entitlement
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.