Is A VA Cash-Out Refinance A Good Idea?
Posted on: October 18, 2018
Depending on when you bought your home, there’s a chance that current mortgage rates are much lower than what you got. To avoid paying higher mortgage rates, many homeowners choose to get a refinance.
For veterans who currently have a VA loan, the streamline refinance (IRRRL) is one way to get a lower mortgage rate. But that’s not the only refinance option available only to veterans.
The VA cash-out refinance is a refinance loan that works differently than the streamline refinance. Instead of just refinancing the mortgage, veterans can also take cash out of their home equity – cash that can be used for anything they want.
The idea of getting cash out of your home is appealing, but is it a good idea for your situation? That’s a difficult question to answer, since everyone’s situation is different and things are constantly changing.
One way to find out if a VA cash-out refinance is right for you is to compare your situation to others.
Reasons veterans get a VA cash-out refinance
Veterans use the VA cash-out refinance for plenty of reasons, the biggest being that they want to get cash.
The cash comes from home equity. So, if you have a mortgage for $200,000 and you’ve paid off $50,000, you can get that full $50,000 back in cash while potentially lowering your mortgage rate.
However, veterans aren’t required to take out the full amount possible. Someone in the same situation could take out $10,000 to fund a small kitchen remodel, or to fund a new car, a boat or a vacation.
It can also be financially responsible to use the cash to pay off other debts, such as credit card debt, if the rate on the other debt is significantly higher than the new rate you’ll get from a cash-out refinance.
Beyond money, veterans with a non-VA loan also take advantage of the program. If you have an FHA or conventional mortgage that requires mortgage insurance, that mortgage insurance can be erased with a VA cash-out refinance.
VA loans don’t require any type of mortgage insurance, and veterans that are VA eligible can use a VA cash-out refinance regardless of what their current loan is. The IRRRL can only be used if the veteran has a VA loan, so this option is only available with cash-out refinances.
Reasons you should avoid a cash-out refinance
In some instances, an IRRRL makes more sense than a cash-out refinance.
If you don’t need cash or you don’t have any plans that require cash, there’s no reason to get a cash-out refinance. The rates associated with the IRRRL tend to be lower, so you could save more money with that type of refinance.
However, the IRRRL requires that veterans are lowering their mortgage rate. That’s not a requirement with the cash-out refinance.
You also shouldn’t feel pressured to get a refinance if you aren’t interested in one. While it’s a good decision for many homeowners, refinancing isn’t the best option for every current homeowner. You should only refinance if you can gain something from the new loan.
Also, when veterans apply for a VA cash-out refinance, they will need to supply their credit. If your credit is lower than it was when you first got a mortgage, there’s a good chance that the refinance can end up increasing your mortgage rate.
Lastly, there are fees associated with all types of refinance, and these fees can sometimes outweigh the money saved. But with a VA cash-out refinance, you can roll the VA funding fee into the mortgage. So, you can essentially get funding for over 100% of your home, if that’s what you’re looking for.
Things you’ll need to apply
If you’ve decided that a VA cash-out refinance is the right option for you, then you’ll need to get ready for the process.
A VA appraisal will likely be required, and it will definitely be required if you have a non-VA loan. Also, you will have to report your credit to whichever lender you choose.
Before applying, you should also spend time deciding if a mortgage is the right option. If your rate is going to increase or if you get 100% financing, you should make sure that you can make the new monthly payments.
If you currently have a non-VA loan, you will also need to make sure that you are VA eligible. You can get your certificate of eligibility through the VA.
Lastly, you’ll want to find the right lender. Not only will the right lender help you get a low rate, but they should give you advice on how to approach the cash-out refinance.