VA Home Equity Loans | Options & Requirements 2021
Unfortunately, the short answer is no: the VA does not have an official home equity loan program. This means they cannot provide home equity lines of credit, a popular loan product that veterans of all stripes use to turn their earned equities into cash.
But, don’t despair. As an honored service member, active or not, you still have options for locking down a VA home equity loan –– specifically, the VA cash-out refinance loan program.
Created over 70 years ago as a way of providing affordable homeownership to U.S. military veterans nationwide the VA cash-out refinance loan program is meant to get cash into the hands of VA members. It does this by allowing Veterans to refinance their current mortgage with a new, larger loan. The difference between each loan is then given as cash, which can be used as if it were a VA home equity loan. It’s as simple as that.Ready for a cash-out refinance? Start here.
What is a home equity loan?
Now, you might be wondering what a home equity loan is, and how exactly it helps you refinance for a larger cash loan. In general, you are allowed to borrow anywhere from 80% to 100% of the current value (equity) of your home, minus what remains of your mortgage balance. For example, if you’re home is currently worth $400,000 and you owe $150,000 left, then the amount you can be cashed-out is found through the following equations:
400,000 x 80% = 320,000
320,000 – 150,000 = 170,000
So, in this instance, you can receive up to $170,000 in cash with a home equity loan. If your loan percentage is 100%, then:
400,000 x 100% = 400,00
400,000 – 150,000 = 250,00
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 rate and interest payment each month until the sum is fully paid. This is why it’s often called a second mortgage since you will engage with it in a similar way.
- 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, or for homeowners that prefer to part out projects into smaller tasks. It can also help if your income varies a lot and you need to address cash-flow issues as they arise.
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.
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 home 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.
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 Department of Veterans Affairs.
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. Plus, approval standards are often easier to meet than other cash-out programs. 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, which often cap loan amounts beneath 100%.
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 might need cash for.
The VA cash-out can pay off and refinance any loan type, Regardless of whether you plan to receive cash at closing. In other words, you can pay off a non-VA loan, cash in hand or not.
Also noteworthy — unlike other non-VA-approved loans, the VA cash-out program requires no mortgage insurance (which is generally required for any loans with equity that is less than 20%). So, essentially with a VA home equity loan, you have the option to refinance out of a conventional loan that requires insurance and take on a loan with a possibly lower interest rate.
With interest rates at all-time lows, many VA homeowners realize they can reduce their other home loan interest rate and monthly payments while taking cash out. It’s a win-win across the board.
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 my current monthly payments?
- Would this change if I added more? 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 with a VA home equity loan, but sometimes that percentage may be less, depending on your lender.)
- 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 pay period W-2 forms for the previous two years
- Copies of your tax returns for the previous two years (not all lenders require this)
- A new appraisal that accurately documents the current value of your home
Keep in mind, that lenders are entitled to impose their own rules and eligibility requirements above and beyond what’s required by the VA.Verify your eligibility for a VA cash-out refinance loan.
How do I decide between a HEL, HELOC, or cash-out refinance for my VA home equity loan?
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 terms, fixed payments, and fixed rates (if you opt for a fixed-rate loan), so you know exactly what you owe each pay period and for how long
- 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 by visiting the 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
- Variable interest rate — HELOCs often carry adjustable rates, which means your monthly payments could vary, and potentially go higher
VA Cash-Out Refinance: This is a good option if you are planning to 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
- No insurance Required — you may pay less overall if you don’t have monthly insurance installments
- 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 VA Home Equity Loan?
The best place to look for a home equity loan in today’s market may be at your local bank or credit union. But shop around online, too, so you can be sure you’re getting the best deal. While 80% or 85% are the most common numbers to see when looking at home equity loans some VA home equity lenders let you take out a second mortgage of up to 90% of your home’s market value — other’s may even offer to advance 100% of your home’s value.
That’s a different situation than VA cash-out refinancing. 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 a lower monthly payment.Verify your eligibility for a VA cash-out refinance loan.