Should I Use a Conventional or VA Refi if I Have 20% Equity?

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A VA loan allows you to purchase a home with zero money down, no mortgage insurance, and a generally favorable interest rate. However, once you’ve built up at least 20% equity, you have the option to refinance into a conventional mortgage with no VA funding fee – typically 0.5% of the new loan amount.

For some homeowners, this could make refinancing from VA to conventional an attractive option. 

Conventional or VA Refi With 20% Equity?

When you have less than 20% equity in your home, refinancing into a conventional loan would require private mortgage insurance. In this case, a VA loan is usually the hands-down winner. 

Current VA loan holders can use the Interest Rate Reduction Refinance Loan (IRRRL) program to adjust their rates and terms with minimal paperwork, a reduced funding fee, and no appraisal. 

A VA refinance also wins if you want to turn your home equity into cash and have less than 20% equity. A conventional cash-out requires at least 20% leftover equity – plus very high rates and fees for cash-out loans.

But the VA-or-conventional refinance decision gets harder once you’ve established 20% equity in your home. 

Conventional lenders do not require mortgage insurance at that point. This brings conventional and VA costs closer together in some situations. Occasionally, a conventional loan turns out to be the better option.

Here are five different scenarios and the considerations that could impact whether you go with a conventional or VA refinance.

Scenario #1: You Plan to Live in Your Home for the Long-Term

Plan to live in your home and keep your loan for the foreseeable future? You’ll usually be better off going with a VA refinance because even though you’ll pay an upfront funding fee, the long-term benefits of a lower interest rate will almost always outweigh the costs.

This is particularly true if you’re doing a streamline VA IRRRL, which only has a 0.5% upfront funding fee. However, cash-out refi borrowers could be dissuaded from using a VA loan, thanks to the hefty 3.3% funding fee.

  • VA IRRRL: 0.50% funding fee ($1,500 on a $300k loan)
  • VA Cash-Out: Usually 3.3% funding fee ($9,900 on a $300k loan)

Example #1 – No-Cash Refi: You’re planning a $300,000 30-year rate and term refinance and have the choice between a VA IRRRL at 6.5% interest or a conventional loan at 7% interest. You have 20% equity, so no conventional mortgage insurance is required. However, the IRRRL has a 0.5% funding fee of $1,500. 

The monthly principal and interest payment on the 6.5% IRRRL would be $1,896, while the same payment on the 7% conventional refinance would be $1,996. The $100 monthly savings with a VA refi allows you to recapture your funding fee in just 15 months.

You’d also pay about $380,000 in lifetime interest on the VA refi loan. Refinancing conventional would mean paying total interest of about $420,000.

30-Year $300k MortgageVA Refinance (IRRRL)Conventional Refinance
Sample Interest Rate6.5%7.0%
Monthly P&I Payment$1,896$1,996
Monthly Savings$100n/a
VA Funding Fee$1,500n/a
Months to Recoup Funding Fee15n/a
Lifetime Loan Interest$380,000$420,000

Example #2 – Cash-Out Refi: You’re planning a $300,000 30-year cash-out refinance and can choose between a VA cash-out at 7% or a conventional cash-out at 7.5%. A conventional loan won’t require mortgage insurance, but you’ll pay a 3.3% funding fee, equal to $9,900, by choosing VA.

The monthly principal and interest payment on the 7% VA cash-out would be $1,996, while the 7.5% conventional cash-out would run $2,098. Here, you would save $102 monthly, although it would take 98 payments – more than eight years – until you come out ahead.

For the VA cash-out refi, you’d pay a total of around $420,000 in interest. With the conventional cash-out, that figure would be $455,000.

30-Year $300k MortgageVA Cash-Out RefiConventional Cash-Out Refi
Sample Interest Rate7.0%7.5%
Monthly P&I Payment$1,996$2,098
Monthly Savings$102n/a
VA Funding Fee$9,900n/a
Months to Recoup Funding Fee98n/a
Lifetime Loan Interest$420,000$455,000

Note: These calculations assume your funding fee is paid out of pocket at closing and not wrapped into your new loan.

Scenario #2: You Plan to Move and Use the Home as a Rental

If you anticipate moving within the next year and keeping your current home as a rental property, you aren’t eligible for a VA refi. Program guidelines require you to certify that you plan to occupy the home as your primary residence for at least 12 months.

If you do not anticipate moving within the coming year but will move eventually and plan to keep your current home when you do, you’ll need to consider both the impact of the funding fee and your VA entitlement.

How Does VA Entitlement Work?

Eligible borrowers who have never used the VA loan program have “full entitlement.” This allows them to purchase a home with zero percent down and no maximum loan limit.

However, once you’ve used up your entitlement, the only way to get it back is to:

  • Sell the home and fully repay the loan
  • Have the loan assumed by another VA borrower with sufficient entitlement
  • Refinance the property through another loan program and do a one-time restoration of entitlement 

If you want to keep your current home, the most practical way to regain full entitlement for your next purchase would likely be to refinance outside of the VA, such as with a conventional loan, and use your one-time restoration of entitlement benefit.

Scenario #3: You No Longer Live in the Home

While the VA loan program is designed to help service members and veterans reduce the cost of housing, it is possible to use a VA streamline to refinance a rental that you previously occupied. 

VA guidelines state that you must certify that you previously occupied the property as your primary home.

In these cases, a VA streamline may be the better option so that you don’t have to take on a non-owner-occupied conventional refinance, which requires very high rates and fees.

Scenario #4: Your Loan is Over Conforming Limits

One benefit of using a VA loan is that borrowers with full entitlement have no mortgage limits. A qualifying VA borrower can get a loan far larger than what conventional lenders would allow.

In most areas of the United States, the maximum conventional loan for a single-family home in 2024 is $766,550. That figure can go as high as $1,149,825 in some high-cost locales. If the loan you need to refinance is above the limit in your area, you won’t be eligible for a conventional loan. You’ll either need to stick with the VA or consider a jumbo mortgage as an alternative.

This could apply to a rate and term refinance where your current VA loan balance is above conforming limits or a cash-out refi where the new total exceeds your area’s maximum loan.

Scenario #5: You Qualify for a VA Funding Fee Waiver

Not accounting for future entitlement needs, you’ll almost always be better off with a VA refi if you qualify for a VA funding fee waiver. 

Your rate will likely be lower than going conventional, and you won’t have a one-time fee swaying overall costs. Plus, if you only need a rate and term refinance, the VA IRRRL will be much simpler and won’t require paying for an appraisal.

To qualify for a VA funding fee waiver, you typically need to be eligible for or currently receiving VA disability compensation. Active-duty servicemembers who have received the Purple Heart can also get the fee waived.

VA vs Conventional Refinance – Some Other Differences

Apart from these five scenarios, there are some other things you’ll want to consider when weighing a VA vs conventional refinance:

Waiting Period for Refinancing

There’s no waiting period to qualify for a conventional rate and term refinance, but you must have had your current loan for at least one year to be eligible for a conventional cash-out refi. VA IRRRL and cash-out refinances require you to wait at least 210 days from when the loan was opened.

Refinance Break-Even Point

Your refinance break-even point is how long it takes for your cumulative monthly savings to outweigh the costs associated with refinancing. Per VA guidelines, lenders must ensure you break even within 36 months on an Interest Rate Reduction Refinance Loan. This rule does not apply to VA cash-outs where you withdraw equity or either type of conventional refi.

Net Tangible Benefit Requirements

VA IRRRLs require refis to pass a net tangible benefit test to qualify. Borrowers refinancing from a fixed rate into another fixed rate must have a new interest rate that is at least 0.5% lower.

Those switching from a fixed to an adjustable rate will need a new introductory rate at least 2% lower. Switching from an adjustable rate to a fixed rate counts as a net tangible benefit on its own.

IRRRL Cash-Back Option

Rate and term refinances typically do not allow borrowers to receive cash back. However, the VA IRRRL program cuts out a unique exception for energy-efficient upgrades. You can do an IRRRL and receive up to $6,000 back as reimbursement for energy-efficient improvements made up to 90 days before closing.

Should I Choose a Conventional or VA Refinance?

If you have at least 20% equity in your home, the interest rate savings from a VA refi will generally outweigh the burden of the VA funding fee, so long as you don’t plan to move or refinance again in the foreseeable future. 

However, borrowers who want to eventually use another VA loan to purchase a new home while retaining their current property may wish to refinance conventional so that they can restore their full entitlement. To discover how each type of refinance would stack up in your own unique situation, check out today’s current refi rates and apply for quotes from a minimum of three competing conventional and VA lenders.

Jonathan Davis - Author at Refi.com

Jonathan Davis

Jonathan Davis is a Florida-based writer with over a decade of experience helping consumers understand complex mortgage, real estate, and personal finance topics. Jonathan has previously worked in the real estate industry and holds a bachelor’s degree in finance from the University of Central Florida.

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