VA Cash-Out Refinance and VA Home Equity Loan: A Complete Guide for Homeowners
Updated: October 13, 2024
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A VA cash-out refinance allows eligible homeowners to replace their existing mortgage with a new one while tapping into their home equity for cash. It can be a solid option for those looking to fund home improvements, pay off high-interest debt or cover other significant expenses.
If you want to leverage your home's value without selling it, a VA cash-out refinance can be smart. In this guide, we'll explain how they work, the pros and cons and when the right choice might be for you.
The VA doesn’t offer home equity loans, but a VA cash-out refinance lets you tap into your home’s equity by borrowing more than you owe.
A VA cash-out refinance usually has lower interest rates and allows you to consolidate high-interest debt into a single, manageable payment.
Consider a VA cash-out refinance for funding home improvements or paying off high-interest debt.
If you’re eligible, you can replace your current mortgage with a VA cash-out refinance loan that lets you access your home equity as cash. This option is particularly appealing if you want to convert a conventional or non-government loan into a VA loan, taking advantage of competitive rates.
The process involves refinancing your existing mortgage and borrowing more than what you currently owe, with the extra funds available for uses like home improvements or debt consolidation. While there isn’t a true VA home equity loan, this refinance option serves a similar purpose by combining your mortgage and the equity you want to access into one new loan.
By refinancing into a VA loan, you gain the security of a government-backed mortgage, often with lower interest rates and better terms. It’s a practical choice for those looking to reduce monthly payments, secure a fixed rate or tap into their home’s value while enjoying the benefits of a VA loan.
An Interest Rate Reduction Refinance Loan (IRRRL) is a streamlined option that lowers your interest rate or converts an adjustable-rate to a fixed-rate mortgage. Unlike a VA cash-out refinance, it doesn’t let you tap into your home equity.
The VA rate is likely better if you need cash for expenses. But if your goal is to lower your interest rate without borrowing extra, the IRRRL may be the right choice.
Understanding the pros and cons of a VA cash-out refinance can help you decide if this option aligns with your financial goals. While it allows you to tap into your home’s equity and secure better loan terms, it’s also possible that you’ll face higher monthly payments or added costs. Here’s a closer look at what you can expect:
Pros | Cons |
|---|---|
Access to Cash: You can use your home’s equity for expenses like home improvements, debt consolidation or education costs. | Risk of Foreclosure: If you fail to make your payments, you risk losing your home since your mortgage is secured by your property. |
Lower Interest Rates: Rates are often lower than conventional loan rates, potentially saving you money over time. | Funding Fee: You may need to pay a VA funding fee, which adds to the cost of refinancing. |
Government-Backed Security: The loan is backed by the Department of Veterans Affairs, providing added security and potentially better terms. | Longer Loan Term: Extending your loan term to lower payments could mean paying more in interest over the life of the loan. |
Replace Non-VA Loans: You can convert a conventional or non-VA loan to a VA loan, often with more favorable terms. | Closing Costs: Like any refinance, there are closing costs that may offset some of the financial benefits. |
To qualify for a VA cash-out refinance, you need to meet specific Department of Veterans Affairs requirements. Knowing these VA cash-out refinance requirements can help you determine if you’re eligible for this option. Here’s what you need to know:
Military Service Eligibility
To qualify for a VA loan, you must have served in the military (active duty, National Guard or Reserves) for an eligible service duration and period. Certain surviving spouses may also be eligible.
Certificate of Eligibility (COE)
A COE from the Department of Veterans Affairs is required to prove your entitlement to VA benefits. It’s essential for securing a VA-backed loan.
Primary Residence Requirement
The property being refinanced must be your primary residence. VA cash-out refinance options aren’t available for investment properties or second homes.
Credit Score
Most lenders prefer a score of at least 620, even if the VA doesn’t specify a minimum. A higher score can improve your chances of approval and better loan terms.
Income and Debt-to-Income Ratio
To ensure affordability, lenders assess your income and debt-to-income (DTI) ratio. Most lenders prefer a DTI ratio below 41%.
Provide your income and recurring payments to calculate your DTI.
Enter all applicable payments to ensure accurate results.
Your eligibility depends on the length and type of service you’ve completed. Here’s a breakdown:
A VA cash-out refinance offers valuable benefits, but understanding the associated expenses is crucial. Here are some typical costs you might encounter:
These include fees for appraisals, title searches and loan origination. These are usually 2% to 5% of your loan amount.
The VA charges a funding fee to help cover the program's costs. This is usually a percentage of the loan amount and can vary based on your service history and down payment.
Borrowing more than your current mortgage balance increases your loan amount, leading to higher monthly payments than your original mortgage.
These may include homeowners insurance, property taxes and interest. Lenders often require these upfront to ensure coverage during the loan's initial period.
Here’s a breakdown of when this type of loan makes sense and when it doesn’t:
Beneficial Uses | Potential Pitfalls |
|---|---|
Home Improvements: Using your home’s equity to fund major repairs or upgrades can increase its value and improve your living space. | Rising Interest Rates: Refinancing in a high-rate environment could mean a higher interest rate on your new loan, increasing your long-term costs. |
Consolidating Debt: If you have high-interest debt, using a VA cash-out refinance to pay it off can simplify payments and lower your overall interest costs. | Luxury Purchases: Using equity for expensive items like a car or a vacation isn’t ideal, as it adds long-term debt for short-term satisfaction. |
Investing: You can use the cash to invest in opportunities that may yield returns, like purchasing rental property or funding a business. | Paying Everyday Bills: If you rely on a cash-out refinance to cover regular expenses, it could indicate a deeper financial issue that needs addressing. |
Paying Off Student Loans: Refinancing to pay off student loans could result in a lower interest rate and simplify your repayment process. | Short-Term Cash Needs: For small, temporary financial gaps, exploring other options like personal loans or credit lines might be better. |
Obtaining this loan involves a few key steps that can help you tap into your home’s equity while securing a VA-backed loan. Here’s a simple guide to walk you through the process:
Confirm that you meet the VA’s military service and financial requirements, including having a valid Certificate of Eligibility (COE).
Determine how much equity you have in your home by comparing your home’s current value to the remaining balance on your mortgage.
Research and compare lenders to find one that offers competitive rates and favorable terms that suit your needs.
Prepare necessary paperwork, including your COE, proof of income, credit information and any other documents your lender may require.
Submit your application to the chosen lender, then work with them through the approval process, which includes a home appraisal and credit review.
Review the final loan terms and costs, sign the closing documents and receive the cash-out funds. Your new VA loan will replace your existing mortgage.
Understanding the details can help you make informed decisions about your financial future. Below are answers to some common questions that might come up during the process:
These loans allow you to borrow more than you owe and pocket the difference as cash. The VA permits borrowing up to 100% of your home’s appraised value, though lenders may have different limits.
No, the VA doesn’t fund your loan. Instead, the Department of Veterans Affairs guarantees a portion of the loan, allowing private lenders to offer more favorable terms.
Qualifying with less-than-perfect credit is possible, but most lenders prefer a credit score of at least 620. Your interest rate may be higher if your credit is lower.
This loan replaces your original mortgage, allowing you to borrow more than you owe and take the difference as cash.
No, there are no specific restrictions. You can use the funds for any purpose, including home improvements, debt consolidation or other personal expenses.
If you borrow more than your current mortgage balance, your monthly payments may increase, as your loan amount and potentially the interest rate will be higher.
About Zachary Romeo, CBCA
Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.
Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.
