A lot of veterans bought their home with an FHA loan. Sometimes the Certificate of Eligibility had not come through in time. Sometimes the seller wanted a faster close. Sometimes nobody at the table brought up the VA option at all.

Years later the loan is still FHA, the mortgage insurance is still on the statement every month, and for most of those borrowers it is scheduled to stay there until the loan is gone.

A VA cash-out refinance can pay off an FHA loan. That part is settled. The useful question is what the whole move costs, what it saves over the years you actually plan to keep the house, and whether the answer holds up once the funding fee and a reset amortization schedule are in it. Smart people miss this every day. The insurance math is buried in a premium table almost nobody reads.

Yes, a VA cash-out refinance can replace an FHA loan

VA lists this directly. Its cash-out refinance loan page says the loan can be used to "Refinance a non-VA loan into a VA-backed loan."

The name confuses people. You do not have to take any cash out. When the loan being paid off is not VA-guaranteed, VA classifies the refinance as a cash-out regardless of whether a dollar reaches your account. An FHA payoff with no cash to the borrower still travels under that heading.

VA sets three conditions on the page above:

  • You qualify for a VA-backed home loan Certificate of Eligibility
  • You meet VA's and your lender's standards for credit, income, and other requirements
  • You will live in the home you are refinancing

Your lender orders a VA appraisal, and the file goes through full credit and income underwriting. This is not a paperwork shortcut. It is a new loan, reviewed like one.

The part of your FHA loan worth a second look

FHA charges mortgage insurance twice. There is an upfront premium of 1.75% of the base loan amount, which most borrowers financed into the balance at closing without ever writing a check for it. Then there is the annual premium, billed monthly, which HUD publishes in its premium tables.

The annual premium is the one that matters here, and specifically how long you owe it.

Eleven years, or as long as the loan lasts

For FHA case numbers assigned on or after June 3, 2013, the duration of the annual premium was set by the loan-to-value ratio at origination. If the original LTV was 90% or less, the premium runs 11 years. If it was above 90%, the premium runs for the mortgage term.

FHA's headline down payment is 3.5%, which puts the original LTV at 96.5%. So the common outcome among FHA buyers is the second column. The insurance is scheduled to last as long as the loan does.

Here is what surprises people. Paying the balance down does not end it. The house appreciating does not end it. Neither does hitting 80% or 78% of current value, because those cancellation rules belong to private mortgage insurance on conventional loans, not to FHA premiums. The clock was set by the LTV at closing and it does not reset on the way down.

If your original LTV was at or under 90%, your premium already has an end date. Find it before you do anything else, because it changes the entire calculation below.

The upfront premium does not travel with you

There is a partial refund schedule on the upfront premium, but HUD applies it as a credit toward a new upfront premium when you refinance into another FHA-insured mortgage, and only within the first three years of insurance. Moving to a VA loan is not that. Whatever remains of that premium stays behind.

This is not an argument against the move. It is a line item people expect to see and do not get, and it is better to know now than at closing.

What the VA side charges instead

VA loans carry no monthly mortgage insurance. Not a reduced premium, and not one that cancels later. The guaranty behind the loan is funded a different way.

That way is the VA funding fee, a one-time charge collected at closing. VA's funding fee page puts cash-out refinancing at 2.15% for first use of the benefit and 3.3% for subsequent use. The fee can generally be financed into the loan, though the total loan amount including the financed fee cannot exceed the reasonable value the appraiser establishes.

A number of borrowers owe none of it. VA lists the exemptions:

  • You are receiving VA compensation for a service-connected disability
  • You are eligible for that compensation but receive retirement or active-duty pay instead
  • You are receiving Dependency and Indemnity Compensation as a surviving spouse
  • You have a proposed or memorandum rating before closing, through a pre-discharge claim
  • You are an active-duty service member with evidence of a Purple Heart on or before your closing date

If you are rated for a service-connected disability, read that list again. It removes the largest single cost of this refinance, and the comparison against an FHA premium that never ends becomes very short.

The net tangible benefit test already agrees with you

Every VA cash-out refinance has to pass a net tangible benefit test. The lender certifies that the new loan does something real for the borrower, measured against a defined list of conditions rather than a sales pitch.

One of those conditions is that the new loan eliminates monthly mortgage insurance, public or private. An FHA-to-VA refinance clears the test on that basis alone, without needing the rate to do the work.

Two related rules often come up in these conversations and do not apply here. The 210-day seasoning certification governs refinances that pay off an existing VA-guaranteed loan. The 36-month fee recoupment requirement applies to Type I cash-out refinances, which also means loans paying off an existing VA loan. Your FHA payoff sits outside both. Your lender may still apply its own seasoning policy, so ask.

Running the math on your own numbers

You can do this at the kitchen table in about ten minutes. It only takes your own figures.

Start with your mortgage statement and find the monthly mortgage insurance line. It is separate from principal, interest, taxes, and homeowners insurance. Multiply it by twelve. That is what the FHA premium costs you every year you keep this loan.

Then estimate the funding fee. Take your payoff balance, add rough closing costs, multiply by 2.15% if this is your first use of the benefit. If you are exempt, the fee is zero and you can skip to the last step.

Divide the fee by the annual premium. That tells you roughly how many years of avoided mortgage insurance it takes to pay for the fee.

Here is an illustration with round numbers. Say the home appraises at $400,000, the FHA payoff is $280,000, and estimated closing costs come to $5,000. A first-use funding fee of 2.15% on a $285,000 base loan is about $6,128, which brings the new loan to roughly $291,128 and a loan-to-value near 73%, comfortably inside the 100% ceiling. If the statement shows $128 a month in mortgage insurance, that is $1,536 a year. The funding fee takes about four years of avoided premiums to earn back.

Four years against a premium with no end date is a different proposition than four years against a premium that expires in year eleven. That is why finding your own duration first matters so much.

Now add the rest of the picture. The rate you are offered on the new loan, the term you choose, the closing costs on your Loan Estimate, and how long you honestly expect to own the house. The Consumer Financial Protection Bureau explains how to read a Loan Estimate line by line, and the total-cost figures on page three are where this decision actually gets made.

What resets, and what that costs

Two things get worse in this trade, and they should be on the page next to the savings.

Your amortization schedule starts over. If you are seven years into a thirty-year FHA loan and you take a new thirty-year VA loan, you have just added seven years of payments to the back end of your housing costs. Early payments are mostly interest, so a restart is expensive in a way the monthly number hides. A twenty or twenty-five year term costs more each month and far less in total. Ask your loan officer to quote both, and look at total interest rather than the payment alone.

Your balance also goes up. The funding fee and any financed closing costs are added to what you owe. You are trading a monthly premium for principal, which is usually the better side of the trade, and it is still a real increase.

When keeping the FHA loan is the better answer

Sometimes it is. A few honest cases:

Your original LTV was 90% or less, so the premium ends at year eleven on its own, and you are already close to that date. Buying out a few remaining years with a funding fee rarely works.

You expect to sell or move within the next two or three years. You would pay the fee and leave before the savings catch up.

The rate you are quoted on the new loan is high enough relative to the one you hold that the added interest outweighs the insurance you stop paying. That comparison depends entirely on your file, and it is worth running rather than assuming in either direction.

You would rather not use VA entitlement on this property right now because you are planning a purchase elsewhere. Entitlement is finite and reusable, and a loan officer can show you how much this refinance would tie up.

Refinancing is not automatically the win. We say no a lot, and an FHA loan eleven months from its premium end date is one of the clearer no's.

Where to start

Pull your mortgage statement and your original closing paperwork. Find the mortgage insurance line and the original loan-to-value. If you do not have a Certificate of Eligibility yet, VA explains how to request one, and most lenders can pull it for you in minutes.

Then have one conversation. A GoodLoan loan officer can run your actual numbers against your actual premium duration and show you both the thirty-year and shorter-term versions side by side, including total cost rather than payment alone. GoodLoan is VA-approved and licensed through the NMLS. If the math says keep your FHA loan, that is what we will tell you.

Frequently asked questions

Do I have to take cash out to use a VA cash-out refinance?

No. VA uses the cash-out designation for any refinance where the loan being paid off is not VA-guaranteed, even when you receive nothing at closing. You can pay off the FHA balance and closing costs and take zero cash.

Can I use a VA IRRRL instead?

No. The Interest Rate Reduction Refinance Loan, sometimes called the VA streamline refinance, only refinances an existing VA-guaranteed loan. With an FHA loan in place, the cash-out refinance is the path into a VA loan. Once you have the VA loan, an IRRRL becomes available to you later.

Will my FHA upfront premium be refunded?

Generally not when you leave FHA. HUD applies the remaining portion as a credit toward a new upfront premium on another FHA-insured mortgage, within the first three years of insurance. Refinancing into a VA loan does not qualify for that credit.

Do I pay the funding fee if I have a service-connected disability rating?

If you are receiving VA compensation for a service-connected disability, you are exempt. So are several other groups listed on VA's funding fee page, including surviving spouses receiving Dependency and Indemnity Compensation. Your Certificate of Eligibility reflects your exemption status, so check it early rather than assuming.

How much of my home's value can I borrow?

VA will not guarantee a cash-out refinance above 100% of the property's reasonable value as determined by the appraiser, and a financed funding fee cannot push the loan past that figure. Individual lenders often set lower caps. Your appraisal decides the ceiling, which is why it is ordered before final numbers are set.

Does the annual premium stop if my home has gone up in value?

No. For FHA case numbers assigned on or after June 3, 2013, the duration was fixed by the loan-to-value ratio at origination. Appreciation and extra principal payments do not shorten it. That is the specific feature that makes this refinance worth pricing for many veterans.