VA Cash-Out Refinance: Is It a Good Idea? | Rates & Guidelines 2021
The VA cash-out refinance program enables veterans and active-duty service members to tap into their home’s equity and, depending on current refinance interest rates, lower the interest rate on their home loan at the same time.
The idea of getting cash out of your home is appealing, but is it a good idea for you? Below, we’ll dive into some of the situations when a VA cash-out refinance might be a good fit — and when it might not.Check your eligibility for a VA cash-out refinance loan today.
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 convert their home’s value into cash. The cash comes from home equity. So, if you have a loan amount of $200,000 and you’ve paid off $50,000, you can get up to $50,000 back in cash, while also potentially lowering your mortgage rate.
Veterans aren’t required to take out the full amount possible, though. A homeowner in the same situation could take out $10,000 to fund a small kitchen remodel, to buy a new car, or pay for a vacation, for example.
The most common reasons for a cash-out refinance is to fund remodels, renovations, and repairs to your home — or to use the cash to pay off other debts. (It may be financially responsible to use a cash-out refinance to pay off credit card debt if the rate on the other debt is significantly higher than the new lower interest rate you’ll get from a cash-out refinance.)
But, there are other potential benefits to a VA cash-out refinance. Borrowers may be able to lower your interest rate and monthly mortgage payment. If you have a conventional loan with private mortgage insurance (PMI), you could remove that extra monthly cost by refinancing into a VA loan. The same is true if you have an FHA loan.
Because VA loans are backed by the Department of Veterans Affairs, they carry lots of benefits. A VA cash-out refinance can help you benefit from them.
Reasons to avoid a cash-out refinance
While it’s a good decision for many homeowners, the refinance option isn’t the best for everyone. You should only refinance if you can gain something from the new loan. When determining whether you’re benefitting from a cash-out refinance, it’s important to consider your whole financial situation and your goals.
And remember, you’ll pay closing costs and the VA funding fee when you open a new VA loan.
It could increase your mortgage rate.
When veterans apply for a VA cash-out refinance, they’ll need to supply their credit score. If your credit score is lower than it was when you first applied for your current mortgage, then there’s a good chance that the refinance could increase your mortgage rate.
The clock restarts on your mortgage.
It’s also important to remember that a cash-out refinance restarts the clock on your mortgage — you’re opening up a new loan with a new loan term, likely 30-years. This means additional interest costs. Because of this, it’s best to use a VA cash-out refinance for things that will improve your financial situation, and, in turn, improve your ability to repay the loan.
Cash-out refinancing is riskier than other loan types.
VA cash-out finances are often used for home improvements that increase the overall value of the investment, education expenses to increase earning potential, new business ventures, or debt consolidation. Still, all of these options can represent a financial risk. Before proceeding with a cash-out refinance, it’s worth investigating other funding options such as personal loans, specialized loans (like student loans or small business loans) or second mortgages (like home equity loans and home equity lines of credit (HELOCs)).
Finally, if you’re using cash from a VA cash-out refinance to pay off credit card debt, it’s important to remember that you’re paying off unsecured debt with secured debt — in other words, you risk foreclosure on your primary residence if you are unable to make your mortgage payments for any reason.
VA cash-out refinance rates
VA cash-out refinance rates are currently low. According to Ellie Mae’s October 2020 Origination Report, interest rates for VA loans hovered at an average of 2.75% — 0.26% lower than interest rates for 30-year, fixed-rate conventional loans.
Read more: Current VA Refinance Rates
With rates projected to remain low, Veterans with a purchase loan originated within the last few years should check to see if a refinance could reduce their interest rate and monthly mortgage payment. Your potential savings are dependent on your unique situation — remember to comparison shop with multiple lenders to see who can offer you the best deal.
When a VA streamline refinance is right instead
If you don’t need to get cash out of your real estate equity, there’s no reason to get a cash-out refinance. In these situations, a VA streamline refinance (also known as an interest rate reduction refinance loan or IRRRL) makes more sense. The rates associated with the IRRRL tend to be lower, which means you can save more on your monthly payments.
If you are looking to get cash for an expense like a remodel or debt consolidation, then a VA cash-out loan is likely the better option. It’s also a good option for Veterans with a non-VA loan requiring mortgage insurance. VA loans don’t require mortgage insurance, so refinancing into one, could remove that monthly expense.
VA streamline refinance vs. VA cash-out refinance
If you’re looking to lower your interest rate and monthly payment, don’t need cash, and already have a VA home loan, an IRRRL is the easier, quicker, and just an overall better option. In fact, streamline refinances require that Veterans lower their mortgage rate to qualify for the loan (also called a net tangible benefit). That’s not a requirement with the cash-out refinance.
If you are looking to get cash for an expense like a remodel or debt consolidation, then a VA cash-out loan is likely the better option. This loan program is also a good option for Veterans with a non-VA loan requiring mortgage insurance. VA loans don’t require mortgage insurance, so refinancing into one, could remove that monthly expense.
A loan officer can help you make sure you’re choosing the right loan type for your situation.
How to apply for a VA cash-out refinance
The application and approval process for a VA cash-out refinance is very similar to the loan application process for a home purchase, including:
- You’ll likely need a VA home appraisal, especially if your existing loan is a non-VA loan. This establishes the current value of your home and helps determine the amount of cash you can take out.
- You’ll need a credit check and income verification to verify that you’re able to make the new VA loan payments.
- You’ll need to establish eligibility with minimum military service requirements, especially if you currently have a non-VA loan. A VA lender can help you request a certificate of eligibility (COE).
Finally, shop around with multiple lenders to compare rates and terms. This can save you lots of money over the life of your VA mortgage and allow you to negotiate better terms.Check your eligibility for a VA cash-out refinance loan today.