Funding Fee and Closing Costs on a Veterans Affairs (VA) Cash-Out Refinance: What to Expect

A Veterans Affairs (VA) cash-out refinance can be a good way to access the equity in your home depending on your situation. Maybe you’re looking for a VA cash-out refinance because you’re thinking about home improvements, consolidating high-interest debt, or covering a major expense. But before you start down that path, it helps to get an idea of what costs can be involved. 

For many veterans, the two biggest questions are: How much is the VA funding fee? And what else will I need to budget for at closing? The answers depend on a few factors, but learning about them before you apply may lead to fewer surprises along the way. 

Here’s what you need to know.

What Is the VA Funding Fee?

The VA funding fee is a one-time payment required by the U.S. Department of Veterans Affairs on most VA home loans, including cash-out refinances. It helps keep the VA loan program running for future generations of veterans, and it’s one of the reasons VA loans don’t require private mortgage insurance (PMI) or often a down payment. 

For a VA cash-out refinance, the funding fee is calculated as a percentage of your new loan amount. The rate depends primarily on whether this is your first time using your VA loan benefit, or a subsequent use. 

• First-time use: 2.15% of the new loan amount 

• Subsequent use: 3.30% of the new loan amount 

VA purchase loans may see changes in the funding fee based on the borrower’s down payment amount. That is not the case with a VA cash-out refinance. The percentage is based purely on your history of using the VA home loan benefit. 

To put that in dollar terms: on a $300,000 refinance, a first-time user might pay a funding fee of $6,450, while a subsequent user could pay $9,900. That’s a cost worth factoring into your overall decision before moving forward.

Is Anyone Exempt from the VA Funding Fee?

Not every veteran has to pay the funding fee, though most do. You may be exempt if: 

• You are currently receiving VA disability compensation for a service-connected disability 

• You are eligible for VA disability compensation but are receiving retirement or active-duty pay instead 

• You are a surviving spouse receiving Dependency and Indemnity Compensation (DIC) 

• You are an active-duty service member who received a Purple Heart on or before your loan closing date 

• You received a proposed or memorandum disability rating before your loan closing date 

If you qualify for an exemption, your Certificate of Eligibility (COE) will typically reflect that status. It’s worth confirming this with your lender early in the process, though, so there are no unexpected funding fee charges at closing.

Can You Finance the Funding Fee?

Yes, and many borrowers do. The VA funding fee can be rolled into your new loan amount rather than paid out of pocket at closing. This can reduce your upfront cash requirements, but keep in mind that it increases your overall loan balance and the total interest you’ll pay over the life of the loan. 

Whether it makes more sense to pay the fee upfront or finance it depends on your specific situation. A mortgage banker who is experienced with VA loans can help you run through the numbers and make an informed decision. 

You can also learn more about the funding fee from the VA’s site here.

What Other Closing Costs Should You Expect?

The funding fee is sometimes the largest single line item at closing, but it’s unlikely to be the only one. VA cash-out refinances come with standard closing costs, similar to other mortgage transactions. Your total closing costs depend on the lender, your location, and the specifics of your loan. 

Here’s a general breakdown of what you might see: 

• Loan origination fee: The VA caps this at 1% of the loan amount. It covers the lender’s cost to process and approve your loan. 

• Appraisal fee: A VA appraisal is required to determine your home’s current market value and whether the home meets the VA’s Minimum Property Requirements.  

• Title search and title insurance: These fees also vary based on your loan amount and location. 

• Credit report fee: Lenders will pull your credit as part of the underwriting process. 

• Prepaids and escrow deposits: You’ll likely need to prepay a portion of homeowners insurance and property taxes, as well as fund an initial escrow account. These amounts can vary significantly depending on your tax rate and insurance premium. 

• Recording fees: Local government charges for officially recording your new mortgage. 

The VA does prohibit lenders from charging certain fees. For example, if a lender is charging the full 1% origination fee, they cannot separately charge additional processing, document preparation, or attorney fees on top of that cap.

Ways to Reduce What You Owe at Closing

A couple of options may help lower your out-of-pocket costs: 

• Lender credits: Some lenders might offer a credit toward closing costs in exchange for a slightly higher interest rate. Depending on the credit amount and the rate difference, this may reduce cash needed at closing. 

• Finance the funding fee: As mentioned, rolling the funding fee into the loan reduces upfront cash, though it increases the loan balance.

Key Takeaways

• The VA funding fee for a cash-out refinance is 2.15% for first-time users and 3.30% for subsequent users of the VA loan benefit, and it applies to the full new loan amount. 

• Some veterans are exempt from the funding fee. Your COE should reflect your exemption status. 

• The funding fee can be financed into a VA home loan rather than paid upfront, but this increases your loan balance and total interest costs.

Final Thoughts

A VA cash-out refinance can be a useful financial tool for the right borrower in the right situation. But like any refinance, it comes with costs. The funding fee and closing costs are not surprises if you know to look for them, though, and now you do. 

If you’re a veteran considering a VA cash-out refinance, it can be helpful to work with a lender experienced in VA loans. Their familiarity with the process may make them a useful guide through the process.