The VA cash-out refinance program enables veterans and active-duty service members to tap into their homeâs equity and, depending on current refinance interest rates, lower their interest rate at the same time.
The idea of getting cash out of your home is appealing, but is it a good idea for you? Below, weâll dive into some of the situations when a VA cash-out refinance might be a good fit â 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 â the biggest being that they want to get cash. The cash comes from home equity. So, if you have a mortgage for $200,000 and youâve paid off $50,000, you can get up to $50,000 back in cash, while also potentially lowering your mortgage rate.
Veterans arenât 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 to get cash from a cash-out refinance is to fund remodels, renovations, and repairs to your home â 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 rate youâll get from a cash-out refinance.)
But, there are other potential benefits to a VA cash-out refinance. You may be able to lower your interest rate and monthly mortgage payment. And, if you have an FHA or conventional loan with mortgage insurance, you could remove that extra monthly cost by refinancing into a VA loan.
Reasons to avoid a cash-out refinance
While itâs a good decision for many homeowners, refinancing isnât the best option for everyone. You should only refinance if you can gain something from the new loan. When determining whether youâre benefitting from a cash-out refinance, itâs important to consider your whole financial situation and your goals.
It could increase your mortgage rate.
When veterans apply for a VA cash-out refinance, theyâll need to supply their credit score. If your credit score is lower than it was when you first applied for your mortgage, then thereâs a good chance that the refinance could increase your mortgage rate.
The clock restarts on your mortgage.
Itâs also important to remember that a cash-out refinance restarts the clock on your mortgage â youâre opening up a new loan with new terms, likely 30-years. This means additional interest costs. Because of this, itâs 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.
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, itâs worth investigating other funding options such as personal loans, specialized loans (like student loans or small business loans) or second mortgages.
Finally, if youâre using cash from a VA cash-out refinance to pay off credit card debt, itâs important to remember that youâre paying off unsecured debt with secured debt â in other words, you risk foreclosure on your home 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 Maeâs Ocober 2020 Origination Report, interest rates for VA loans hovered at an average of 2.75% â 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 who purchased a home 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 â remember to comparison shop with multiple lenders to see who can offer you the best deal.
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When a VA streamline refinance is right instead
If you donât need cash, thereâs 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, so you could save more money with that type of refinance.
If youâre looking to take out cash for energy-efficiency improvements to your home, the IRRRL allows homeowners to finance up to $6,000 in improvements that will save money over time, including programmable thermostats, insulation, solar heating, and caulking/weather stripping.
VA streamline refinance vs. VA cash-out refinance
If youâre looking to lower your interest rate and monthly payment, donât need cash out and already have a VA loan, an IRRRL is the easier, quicker, and just plain better option. In fact, streamline refinances require that Veterans lower their mortgage rate to qualify for the loan (also called a net tangible benefit). Thatâs 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. Itâs also a good option for Veterans with a non-VA loan requiring mortgage insurance. VA loans donât require mortgage insurance, so refinancing into one, could remove that monthly expense.
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:
- Youâll likely need a VA 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.
- Youâll need a credit check and income verification to verify that youâre able to make the new VA loan payments.
- Youâll need to establish eligibility with minimum service requirements, especially if you currently have a non-VA loan.
Also, shop around with multiple lenders to compare rates and terms. This can save you lots of money over the life of the loan and allow you to negotiate better terms.
Check your eligibility for a VA cash-out refinance loan today.