The question of whether to refinance a VA loan to conventional keeps coming up in veteran forums, and for good reason. On the surface, ditching that VA funding fee and eliminating the stigma some sellers attach to VA offers sounds appealing. But here’s what most veterans don’t fully grasp: your VA loan benefit is one of the most valuable financial tools you’ll ever have access to, and trading it away for a conventional loan often means paying more over the long run while gaining very little.
The Real Reason Veterans Consider This Switch
Let’s be honest about what’s driving this decision. It’s rarely about the math—at least not initially. Veterans typically consider refinancing from VA to conventional for a few specific reasons: they want to drop mortgage insurance they think they’re paying, they’re planning to buy another property and want to “free up” their VA entitlement, or they’ve heard that conventional loans are somehow better or more respected.
The mortgage insurance concern is the most common misconception. VA loans don’t have traditional PMI—they have a one-time funding fee that’s already been rolled into your loan or paid upfront. You’re not paying monthly mortgage insurance on a VA loan. If you refinance to conventional with less than 20% equity, you’ll actually start paying PMI that you didn’t have before. That’s a step backward, not forward.
The entitlement concern is more legitimate but often misunderstood. You can actually have multiple VA loans simultaneously in many cases. Refinancing to conventional to “restore” your entitlement might be unnecessary if you still have remaining entitlement or if you’re eligible for a second-tier entitlement in higher-cost areas. Before assuming you need to refinance, check with a VA-specialized lender about your actual entitlement status.
When the Numbers Actually Favor Conventional
There are genuine scenarios where refinancing from VA to conventional makes financial sense, but they’re narrower than most people think.
You have significant equity and excellent credit. If you’ve built up 25-30% equity and your credit score is above 760, conventional loans might offer marginally better interest rates than VA loans in some market conditions. The difference is typically small—we’re talking 0.125% to 0.25% in most cases—but over a 30-year loan, that can add up to real money. According to data from Freddie Mac and the Consumer Financial Protection Bureau, borrowers with excellent credit and substantial equity consistently qualify for the most competitive conventional rates. Run the actual numbers with current quotes, not assumptions.
You’re planning to convert the property to a rental. VA loans require owner occupancy, as stipulated in the VA Lender’s Handbook. If you’re moving out and want to keep the property as a rental while buying a new primary residence with your VA benefit, refinancing the old property to conventional makes your VA entitlement available for the new purchase. This is one of the strongest cases for the switch.
You’re removing a co-borrower. If you went through a divorce or need to remove someone from the loan, refinancing might be necessary anyway. In this situation, comparing VA streamline options versus conventional refinancing makes sense, though refinancing after divorce involves its own set of considerations.
The Hidden Costs Most Veterans Miss
Here’s where the decision gets complicated. Refinancing isn’t free, and the costs of switching from VA to conventional often exceed what veterans anticipate.
Closing costs on conventional refinances typically run 2-4% of the loan amount. On a $300,000 loan, that’s $6,000 to $12,000. VA streamline refinances (IRRRLs) often have significantly lower closing costs and don’t require an appraisal. If you’re refinancing anyway, staying within the VA system is usually cheaper.
You lose the VA loan’s foreclosure protections. VA loans come with special forbearance options and loss mitigation assistance through the VA’s Loan Guaranty Service that conventional loans don’t offer. If you ever face financial hardship, those protections could be the difference between keeping and losing your home. This isn’t hypothetical—according to the Mortgage Bankers Association’s National Delinquency Survey data, veterans who had VA loans during the 2008 financial crisis experienced significantly lower foreclosure rates than those with conventional mortgages, largely due to the VA’s intervention programs.
Conventional loans have stricter qualification requirements. If your financial situation changes and you need to refinance again later, conventional lenders will scrutinize your debt-to-income ratio and credit more harshly than VA lenders typically do. The VA’s more flexible underwriting guidelines—which allow DTI ratios up to 41% and sometimes higher with compensating factors—might qualify you for VA refinancing options that wouldn’t be available on the conventional side.
The Entitlement Restoration Myth
One of the most persistent misconceptions is that refinancing to conventional “gives back” your VA entitlement for future use. This is technically true but often unnecessary.
Your VA entitlement isn’t a one-time benefit—it’s a renewable resource under certain conditions. If you sell a home purchased with a VA loan and pay off the loan, your full entitlement is restored automatically. You don’t need to refinance to conventional first.
Even if you’re keeping the property, you may have remaining entitlement or bonus entitlement that allows for another VA loan. The VA allows for second-tier entitlement in counties where the conforming loan limit exceeds the basic entitlement amount. According to the VA’s current guidelines, many veterans can purchase a second home with VA financing without touching their first VA loan, especially in higher-cost areas where bonus entitlement applies.
Before refinancing to conventional to “restore” entitlement, get your Certificate of Eligibility and have a VA lender calculate exactly what entitlement you have available. You might be surprised to find you don’t need to refinance at all.
What About the VA Funding Fee?
Some veterans consider switching to conventional specifically to avoid future VA funding fees if they refinance again later. This reasoning deserves scrutiny.
The VA funding fee—which ranges from 0.5% to 3.3% depending on down payment, loan type, and whether it’s your first VA loan use—is a one-time cost that funds the VA loan program. Yes, it adds to your loan balance. But compare that to conventional PMI, which costs 0.5% to 1% of your loan balance annually until you reach 20% equity.
On a $300,000 loan with 5% down, conventional PMI might cost $150-250 per month until you hit that equity threshold. Even a 2.15% VA funding fee ($6,450 rolled into your loan) is often cheaper over time than years of monthly PMI payments. The breakeven calculation depends on how quickly you’ll build equity, but for many veterans, the funding fee is the better deal despite the sticker shock.
Veterans with service-connected disabilities are exempt from the VA funding fee entirely, making the VA loan even more advantageous. If you have any disability rating, refinancing to conventional almost never makes financial sense.
A Decision Framework That Actually Works
Rather than relying on general advice, work through these specific questions:
What’s driving this decision? If it’s based on misconceptions about PMI or entitlement, stop and get accurate information first. If it’s based on a specific financial goal like converting to rental property, proceed to the next questions.
What are the actual costs? Get real quotes for both VA streamline and conventional refinancing. Include all closing costs, any PMI you’d pay with conventional, and the difference in interest rates. Calculate the break-even point—how many months until the savings exceed the costs.
What’s your timeline? If you’re planning to sell within 5 years, refinancing rarely makes sense regardless of loan type. The closing costs almost never pay off that quickly unless rates have dropped dramatically. Understanding the real cost of refinancing helps frame this calculation.
What’s your backup plan? If your income dropped by 30% next year, which loan type would give you more options? VA loans generally offer more flexibility in hardship situations.
The Bottom Line on VA to Conventional Refinancing
For most veterans, refinancing from VA to conventional is a solution in search of a problem. The VA loan benefit exists because military service comes with sacrifices, and this is one way the country says thank you. Trading that benefit for a conventional loan often means paying more in closing costs, potentially adding PMI, losing foreclosure protections, and giving up access to future VA refinancing options.
The scenarios where conventional refinancing genuinely makes sense are specific: you have substantial equity, excellent credit, and either a concrete plan to use your VA entitlement elsewhere or a need to convert the property to non-owner-occupied status.
If you’re considering this switch, get quotes for both options and run the numbers over your actual expected holding period. Don’t rely on general assumptions about which loan type is “better.” And whatever you do, don’t refinance to conventional just because someone told you VA loans are somehow inferior—that advice usually comes from people who don’t understand what they’re talking about.
Your VA benefit is valuable. Make sure you’re getting something equally valuable in return before you trade it away.