Does the VA Offer a Home Equity Loan?
In June 2019, the CoreLogic equity report found that American homeowners added $486 billion in equity in the first three months of the year. That brought the total amount of equity added since 2011 to $5.6 trillion. If some of that equity belongs to you, then you’re eligible to turn that equity into cash.
Unfortunately, the VA does not offer a home equity loan or home equity line of credit, which are popular loan products to turn your earned equity into cash.
But, don’t despair. You still have options.
The VA cash-out refinance loan program allows Veterans to refinance their current mortgage with a new, larger loan and you get the difference you get in cash.
Why doesn’t the VA offer home equity loans or HELOCs?
Simply put: because the VA only backs first-lien mortgages. A home equity loan (also called a second mortgage) is an additional loan to your first mortgage (HELOCs work a little differently) and is essentially a second lien on your mortgage.
Even though the VA doesn’t guarantee home equity loans, you can still borrow from an independent lender, while keeping your VA loan as your first mortgage. Both home equity loans and HELOCs allow you to turn your equity into cash for any purpose from home improvements to debt consolidation to large purchases. Though, like your first mortgage, if you fail to keep up on payments with a second mortgage your home is on the line.
What is equity? It’s the difference between the market value of your home today and your current mortgage balance.
Types of home equity loans
There are two types of non-VA home equity lending and each one is suitable for slightly different situations.
- Home equity loan (HEL): The home equity loan is similar to a first mortgage — it’s a one-time, lump-sum loan, often with a fixed interest rate. You get all the funds up front, then pay a fixed principal and interest payment each month until fully paid. This is why it’s often called a second mortgage.
- Home equity line of credit (HELOC): A HELOC is more like a credit card. You have a maximum limit and withdraw funds as needed — you can borrow, repay, and borrow again at will. Typically you pay just the interest due for a certain amount of time, say 5 or 10 years, after which you start paying down the principal (the balance at that time) as well. This type of loan is great for home improvement projects where you need smaller amounts of cash as you go along. It can also help if your income varies a lot and you need to address cash-flow issues.
Advantages of home equity loans
Interest rates for a home equity loan or home equity line of credit (HELOC) can be very low — much lower than interest rates on credit cards and personal loans.
This is why many homeowners find this type of financing perfect for home improvement projects, car purchases, or even to finance a child’s college education. They’re also often used to consolidate debts that are becoming burdensome.
The VA cash-out refinance is an alternative to home equity loans
While the VA does not offer home equity loans, VA cash-out refinance loans are available. This refinance mortgage replaces your existing mortgage with a new, bigger one and you take the difference out in cash. It’s an alternative to turn your equity into cash, without taking on a second mortgage and it’s backed by the VA.
Advantages of a VA cash-out refinance
With a VA cash-out refinance, some lenders allow you to take out a new loan of up to 100% of your home’s current value. This makes VA cash-out financing much better than other cash-out mortgages — and a serious competitor to the traditional home equity loan or HELOC.
As with other home equity products, you can use the cash from a cash-out refinance for home improvements, debt consolidation, college education, investments — basically, for anything you need cash.
Also, with interest rates at all-time lows, many VA homeowners realize they can reduce their home loan interest rate and monthly payments, while taking cash out. It’s a win-win.
Are you eligible for a VA cash-out refinance?
Before you apply for a VA cash-out refinance ask yourself the following questions to determine whether it’s the right loan product for you.
- Can I comfortably afford the new monthly payments?
- Is my income reasonably secure?
- Do I have enough equity in my home value to make a refinance worthwhile? (You can often borrow up to 100% of your home’s market value.
- Is my credit score high enough to qualify? (620+ is usually fine, but some lenders may go lower.)
- Am I comfortable paying closing costs? (These are similar to your original mortgage and can be paid in cash or added into the new loan.)
- How will my interest rate change? It’s rarely wise in the long term to refinance to a higher rate.
According to the VA, you’ll also need to provide your lender with:
- Your certificate of eligibility, which you should have from your original loan.
- Copies of pay stubs for the most recent 30-day period
- W-2 forms for the previous two years
- Copies of your tax returns for the previous two years (not all lenders require this)
Keep in mind, that lenders are entitled to impose their own rules and eligibility requirements above and beyond what’s required by the VA.
How do I decide between a HEL, HELOC, or cash-out refinance?
You may already have a sense of which home equity loan product is best for you and your circumstances. But, if not, below is a brief breakdown of the pros and cons of each loan type. Remember, though, that all of these products require you to put your home on the line and you could face foreclosure if you fall behind in payments.
Home Equity Loan (HEL): A solid loan for conservative borrowers.
- Safe and predictable — fixed term and fixed payments (if you opt for a fixed-rate loan), so you know exactly what you owe
- Inflexible — with everything fixed that leaves little room to maneuver once you’ve signed up
- Inexpensive to set up — typically lower closing costs than a refinance, which can be rolled into the new loan
- More expensive to maintain — interest rates and total payments (your HEL, plus your mortgage) are typically higher than with a refinance
Home Equity Line of Credit (HELOC): These can be complicated. Learn more before you sign: Consumer Financial Protection Bureau’s HELOC guide.
- Highly flexible — borrow, repay, and borrow again up to your credit limit
- Inexpensive to set up — similar to a HEL and usually cheaper than a refinance
- May be inexpensive to maintain — initially, you pay only interest on your monthly balance
- Beware of draw period end — once that initial “draw” period ends (often after five or 10 years) you won’t be able to borrow more and will have to pay interest, while also paying down your balance.
VA Cash-Out Refinance: This is a good option if you can refinance into a lower mortgage rate.
- Often the lowest “total cost of borrowing” — how much you’ll have paid in interest and fees when you make your last payment
- Expensive to set up — you’ll have to pay closing costs and other fees, though, those can be added to the new mortgage amount
- Lower your existing monthly payments — by either refinancing into a lower interest rate or “resetting the clock” on your existing mortgage (spreading the payments over a new 30-year loan term)
Where Do I Apply For A Home Equity Loan?
The best place to look for a home equity loan in today’s market may be at your bank or credit union. But shop around online, too, so you can be sure you’re getting the best deal.
Some home equity lenders let you take out a second mortgage of up to 90% of your home’s market value — it’s rarer to find one that will advance 100% of your home’s value.
That’s a different situation than VA cash-out refinances. Many lenders routinely offer loans at 100% of a home’s value. And, depending on your current mortgage rate and the time left to repay your mortgage, you may even be eligible for lower monthly payment.