VA Streamline vs. Cash Out Refinance
Posted on: February 19, 2020
There has never been a better time to refinance your VA loan — especially when current mortgage interest rates are at multi-year lows. And, they’re not too far off the all-time record low set at the end of 2012.
In general, Veterans and active-duty servicemembers want to refinance for the following reasons:
- To get a lower monthly payment
- To get cash back
The VA has two refinance options available, one for each of those circumstances. All you have to do is choose the one that best meets your needs.
VA Streamline Refinance
The VA streamline refinance, also known as an interest rate reduction refinance loan (IRRRL), has one of the easiest refinancing processes of any type of home loan. You won’t have to supply your income information, household budget, or credit score (some lenders may pull your credit report to make sure you’re still in good financial standing, though). And, you also don’t need an appraisal, which saves a lot of time and energy.
Overall, you’ll be able to skip most of the documentation that’s usually required with a refinance, but there are still a few requirements that need to be met to be eligible. Those requirements include:
- Your current loan must be a VA loan.
- Your new monthly payment must be lower than your current one (this is called a net tangible benefit).
- You must be occupying the home that your refinance loan secures.
- You must have made on-time payments over the past year, with no more than one late payment that was 30+ days late in the past 12 months.
- The closing date of the streamline refinance must occur after the following: It has been at least 210 days since you’re first payment on the current loan, and you’ve made at least 6 full payments.
Keep in mind that if you have an existing second mortgage (usually a home equity loan or a home equity line of credit), then the lender for that mortgage must agree that your new, refinanced loan counts as the first mortgage. This concerns a legal issue called “subordination” that only affects second mortgages.
VA Streamline Refinance Pros & Cons Table
|You’re not required to document your income or credit score, or get an appraisal, so it closes faster than other loan types.||You must currently have a VA loan.|
|You can roll up closing costs into the loan amount, and there’s no maximum loan limit.||You must end up with a lower monthly payment, which could affect borrowers who want to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.|
|You may borrow up to $6,000, but only for energy-efficiency improvements.||You can’t borrow more than your home’s market value.|
VA Cash-out Refinance
The second refinancing option is the VA cash-out refinance. Unlike the IRRRL, this refinance option lets you take cash out upon closing. And, there are no restrictions on how you can use the money — home improvements, large purchases, a much-needed vacation — it’s your call. Though, many borrowers use the funds to consolidate existing high-interest debts into one affordable monthly payment.
Another potential benefit: If you currently have an FHA or conventional mortgage loan, and are paying private mortgage insurance (PMI) every month, then refinancing into a VA cash-out loan removes PMI. Mortgage insurance isn’t a requirement of a VA home loan like other loan types.
The cash you take out will be some or all of the “equity” you’ve built up in your home.
Your equity is the amount by which the current market value of your home exceeds your current mortgage balance. (For example, if the current value of your home is $350,000 and your mortgage balance is $250,000, then your earned equity is $100,000.)
Most homeowners build up equity by simply paying down their mortgage, though equity can also be earned with specific home improvements and as a result of home price inflation.
With a VA cash-out refinance, you can borrow up to 100% of your home’s market value (few other loan types allow this). If your existing mortgage balance exceeds the value of your home, then you have no equity and won’t be able to take out any cash with a refinance. You may still be eligible for a VA streamline refinance to get a lower monthly payment.
The primary difference between the VA streamline refinance and VA cash-out refinance is the amount of paperwork — it’ll be similar to what you experienced with your existing mortgage. This means you’ll have to do the following:
- Meet credit score requirements (most lenders want a score of 620+)
- Complete a home appraisal (this establishes how much money you can take out)
- Establish debt-to-income ratio is less than 41% of your gross income
- Pay an upfront, one-time VA funding fee (between 2.15%-3.3% of the loan amount)
- Have no late payments in the last 12 months
- Occupy the home that your refinance loan secures
VA Cash-out Refinance Pros & Cons Table
|You can refinance a non-VA loan, so you may be able to remove the mortgage insurance payment.||You’re required to pay a one-time VA funding fee (2.15%-3.3% of the loan amount), which can be rolled into your new loan amount.|
|You can borrow all of the earned equity in your home (100% of its market value) unlike other refinance loan types.||You must have earned equity in your home to get cash out.|
|You get cash in hand with no restrictions on how you can use the funds.||You must meet income and credit score requirements as well as complete a home appraisal, which increases the time to close.|
How to decide between a VA streamline and a VA cash-out refinance
It really comes down to your refinance goals. If you’re looking to lower your monthly payment, than a VA streamline refinance is your best bet — it’s relatively quick, inexpensive, and easy to qualify for. But, if you need cash to pay for home improvements or consolidate high-interest debt like credit cards, then a cash-out refinance is the right choice.
Keep in mind that depending on what you’d like to use the cash for, you may have other options than refinancing your current loan. If you have a really low interest rate currently or don’t want to restart the clock on another mortgage, then the following options may be a better option for you:
- Home improvements — home equity loans (HEL) or a home equity lines of credit (HELOC) are typically less expensive to set up than a refinance with similar low interest rates.
- Debt consolidation — personal loans typically have lower interest rates than credit cards and are quick and inexpensive to process; paying off multiple high-interest cards at once also helps with your credit utilization percentage, which can increase your credit score.
Is it time to refinance?
Mortgage interest rates are at multi-year lows and the average VA interest rates are even lower. In fact, Ellie Mae’s January 2020 Origination Report showed that the average 30-year interest rates for VA home loans decreased to 3.64% in January. This is lower than both conventional (4.03%) and FHA (3.91%) loans.
Similarly to your existing mortgage, you won’t be borrowing from the VA itself — the VA only guarantees part of your loan, a private-sector lender funds it. As importantly, you don’t have to use your existing lender when you refinance. Here’s some advice from the VA’s website:
“You’ll go through a private bank, mortgage company, or credit union — not directly through us — to get an IRRRL [or cash-out refinance]. Terms and fees may vary, so contact several lenders to check out your options.”
Shopping around for lenders saves you money — potentially thousands of dollars not only in fees, but also over the life of the loan.
Peter Warden has been writing for a decade about mortgages, personal finance, credit cards, and insurance. His work has appeared across a wide range of media. He lives in a small town with his partner of 25 years.