VA Cash-Out Refinance Rates, Guidelines, and Limits
The VA cash-out refinance program is popular with veterans and active-duty servicemembers who want to tap into their home’s equity and lower their interest rate too.
Qualified borrowers can use cash proceeds from their refinance to make home upgrades, pay down high-interest loans and credit cards, take a vacation, or for any other purpose. Low interest rates and flexible payment terms make it a great time to invest in your home or use equity to pay off other expenses.
Benefits of the VA cash-out refinance
The VA offers some special privileges with a cash-out refinance as it does with home purchase loans. Some of the benefits include:
- Finance up to 100% loan-to-value (LTV) ratio. You can borrow up to the full market value of your home. (This may vary by lender. Some only allow you to take up to 90% of your home’s value. If you need 100%, shopping around may be necessary.)
- Eliminate mortgage insurance. VA loans don’t require PMI like other loan types; refinancing into a VA loan can remove this added cost.
- No out-of-pocket closing costs. Loans can be structured to include all closing costs into the new loan amount, so no cash is required at closing.
- Low VA funding fees. This one-time fee is between 2.3%-3.6% of the loan amount unless exempt.
- Refinance any loan type. A VA cash-out refinance can pay off any type of home loan for eligible veterans.
- Lower refinance rates. VA cash-out refinance rates are typically lower when compared to other loan types. Ellie Mae’s June 2019 Origination Report stated that the average VA interest rates decreased to 4.2% from May for 30-year loans, which is lower than both conventional (4.41%) and FHA (4.49%).
How the VA cash-out refinance works
A VA cash-out refinance loan allows veterans and active-duty servicemembers to do one or both of the following:
- Open a loan that is larger than their current one and receive the difference in cash, or
- Pay off an existing non-VA loan.
Most cash-out refinance applicants want to get a large lump sum of money for home improvements, but many also use the funds to pay down existing, high-interest debts like credit cards or student loans. Though, there are no restrictions on how you can use the money.
Other applicants, particularly those with non-VA loans like conventional or FHA, use a VA cash-out refinance to eliminate mortgage insurance, which provides significant savings both monthly and over the life of the loan.
For example, if you have a $200,000 FHA loan and you made the minimum down payment (3.5%), the annual mortgage insurance premium is 0.85% of the loan value. That may not sound like much, but it equals $141.66 per month — every month. FHA loans require mortgage insurance for the life of the loan, so for a 30-year term, the total insurance costs equals $50,998.
VA cash-out refinance eligibility requirements
VA cash-out refinance eligibility requirements are similar to those for a VA purchase home loan — first, an applicant must meet the established eligibility guidelines, including an adequate service history. (Also, all Veterans must have been discharged under conditions other than dishonorable.) Eligibility can be established for:
- Veterans with an honorable discharge and adequate service history
- Current active-duty servicemembers with adequate service history
- Current Reserve and members of the National Guard (6 years of service is typically required)
- Unmarried surviving spouses
- Commissioned officers of the Public Health and National Oceanic and Atmospheric Administration
If you are uncertain if you’re eligible, call (866) 240-3742 to speak with a licensed lender who can answer your questions and help you apply.
VA cash-out refinance with bad credit
The VA doesn’t set a minimum credit score for any of its loans. Unfortunately, that doesn’t mean getting a VA cash-out refinance with bad credit is a done deal. That’s because lenders can superimpose their own rules over the VA’s — many won’t work with a borrower with a FICO credit score below 620. A few do but they might take some tracking down. A smarter move might be to work on improving your score.
VA cash-out refinance guidelines for 2020
Recently, the Blue Water Navy Vietnam Veterans Act of 2019 was enacted, which removes the existing loan maximums for VA loans. This goes into effect January 1, 2020, but even if the VA no longer has loan limit maximums that doesn’t mean lenders won’t impose them. Only time will tell how and if this change will make a difference to homebuyers.
For an in-depth look at VA loan limits, see our VA loan limits page.
Closing costs and funding fees
Similar to loan limits, closing costs are similar to those for a home purchase mortgage. Though, unlike a home purchase, there’s no seller to negotiate paying your closing costs.
The good news is VA loan closing costs, including the funding fee, can typically be rolled into the new loan amount, so no out-of-pocket cash is needed. However, even with the most generous lender, your new loan amount and the closing costs combined can’t exceed 100% of your home’s market value.
The one-time funding fee for a VA cash-out refinance is between 2.3%-3.6% of your loan amount. Exactly how much will depend on whether you’ve used a VA loan in the past.
Read more: 2020 VA Funding Fee Chart
An appraisal is required for a VA cash-out refinance — the VA and your lender need to know your home’s current market value when determining how much cash you can take out. An independent expert will verify that and an appraiser’s fee will be among your closing costs.
Is a VA streamline refinance worth it?
The VA also offers another refinance loan called a streamline refinance or the Interest Rate Reduction Refinancing Loan (IRRRL). You need a current VA loan to qualify and it isn’t for those looking to take out cash. But, it’s great for those who want to get either a lower interest rate (if you can qualify for a lower rate than your current loan) or to reduce their monthly payment. Lower interest rates can lower your overall monthly mortgage amount as well as “reset the clock” on your existing loan (payments are spread over another 30 years instead of the period left on your existing loan).
Read more: VA Streamline Refinance (IRRRL Program)
VA Cash-out vs. VA Streamline Refinance
|VA Streamline Refinance||VA Cash-out Refinance|
|Can combine 1st and 2nd mortgage||No||Yes|
|Maximum LTV||No maximum/not verified||100% (in some cases)|
|Maximum loan amount||Current loan balance, plus closing costs||None|
|VA funding fee||0.50% (unless exempt)||2.3%-3.6% (unless exempt)|
|Late payments allowed (last 12 months)||1 (30 days)||0|
|Must be owner-occupied property||No||Yes|
Source: VA Handbook
Perhaps the most notable difference between these two refinance programs is that the VA cash-out refinance loan has a maximum loan-to-value (LTV) of 100%, but there is no maximum LTV for VA streamline refinances. This is because the VA streamline refinance does not require an appraisal, so the current value of the home is not determined. An appraisal and a current home value is required for a cash-out refinance however.
What does all that mean? You can get a VA streamline refinance (IRRRL), even if your home is “underwater” — you owe more on your mortgage than your home’s worth.
The VA refinance application process and next steps
Here are four things you should ask yourself before you get started:
- Can you afford the new loan? In other words, do you have enough income to meet your monthly mortgage payments, pay your monthly debts and other financial obligations, and still have enough left to pay for food and other living expenses?
- Does the refinance apply to the mortgage on the home you’re currently living in? You can’t get a cash-out refinance for an investment property.
- Do you have at least a fair credit history? Most lenders insist on a 620 minimum score for VA loans.
- Do you have your DD-214? This document is needed for your lender to obtain your Certificate of Eligibility. If you don’t have it, then your lender can help you obtain it.
Overall, the application process is easy, though the appraisal is an added step that can increase the time for processing a VA cash-out refinance.