In this article
- Understanding the Concept of a VA Cash-Out Refinance
- What are the Benefits?
- VA Cash-Out Refinance Rates
- 2022 Guidelines for VA Cash-Out Refinance
- What Does the Process Look Like?
- VA Cash-Out Refinance Loan Limits
- Selecting VA Cash-Out Lenders
- How Can You Utilize Your Newly Accessed Funds?
- 1. Use The Loan Proceeds to Pay Off Mortgage Insurance
- 2. Pay Off Other Loans
- 3. Refinance Your High-LTV Mortgage for a Lower Interest Rate
- 4. Use The Money to Consolidate Other Debts
- FAQs About a VA Cash-Out Refinance
The VA cash-out refinance offers many benefits for eligible veterans. It allows access to all the equity in your home, regardless of the type of mortgage you currently have. The process is efficient and streamlined, and you can even do it if you’re not currently a VA loan holder. Best of all, you’ll get great rates, cash back at closing, and no mortgage insurance. If you’re a veteran who’s looking to refinance, the VA cash-out refinance should be at the top of your list.
Understanding the Concept of a VA Cash-Out Refinance
This type of loan lets veterans tap into their home equity to finance other expenses, such as a home improvement project, medical bills, or college tuition. In a VA cash-out refinance loan, the new loan amount is higher than the existing loan. The difference between the two loan amounts is given to you as cash-back at the time of closing.
These loans can be used to replace one of your non-VA loans to lower the overall mortgage interest rate. This helps you to not cash out your full equity amount and save it for later.
What are the Benefits?
The VA Streamline Refinance program, also known as the “IRRRL,” lets veterans refinance their existing VA loans at a lower interest rate. However, this program does not allow for any cash back at closing. Here are a few reasons why you should opt for VA cash-out refinance instead:
- For veterans who are looking to receive cash out of their equity, the VA cash-out refinance is the better option. You can receive up to 100% of your equity as cash back at the time of closing.
- In addition, this program allows you to refinance a non-VA loan into a VA loan. This can be beneficial if you have an existing FHA loan, USDA loan, or conventional loan with PMI and are looking to get rid of your mortgage insurance.
- It lets you leverage up to 100% of your home’s value. That means you may be able to get a loan that’s equivalent to the value of your home. Other refinancing options usually provide a maximum of 80% LTV.
- You can use the cash-back from the refinance for various purposes, including paying off other debt, paying medical bills, or investing in real estate.
For example, you own a property worth $400,000 and your current loan balance is $200,000. You are eligible to open a new VA cash-out loan for a maximum of $400,000. In this case, you will receive $200,000 cash-back after deducting the closing costs. This type of facility gives you access to instant cash without borrowing from someone else.
VA Cash-Out Refinance Rates
Veterans can use the equity in their homes for refinancing a new loan with a lower interest rate or to receive cash back. The VA backing typically results in the lowest interest rates available in the market, making this an excellent option for those looking to save on their monthly payments.
As of writing this, the current rate of VA refinance starts at around 4.5%. The conventional 30-year loan plan has a refinance rate of around 4.874%, making VA refinance a better option. Here’s an overview of the VA loan rates:
30-year fixed rate = 4.5%
15-year fixed rate = 5.375%
This rate is for those who have a 740 credit score. A few more assumptions made while calculating the VA loan rate are as follows:
- No-cash-out mortgage rates are slightly lower than cash-out interest rates.
- You may see a difference of 0.125 to 0.25% in cash-out refinance rates from VA loan rates.
There are a few key factors that will affect your refinance rate if you decide to go for a cash-out refinance. One important factor is your credit score. With a good credit rating, you have a better shot at getting a lower interest rate on your new loan.
Another factor is your home equity. If you have a lot of equity in your home, you may be able to get a better deal on your refinance. However, it’s always best to compare rates from multiple lenders to make sure you’re getting the best possible deal.
2022 Guidelines for VA Cash-Out Refinance
Here are some of the eligibility criteria set by the Department of Veterans Affairs (DVA):
- You should have a credit score of at least 580 to 620.
- You must be employed and have a stable income.
- Your debt-to-income ratio should be under 41%.
- You should have enough home equity to take cash out.
- You should have a working history in military service. You will get your Certificate of Eligibility for serving in the military.
You can be directly eligible for a VA loan if you’ve served under the following circumstances:
- At least 90 days in wartime.
- 90 days in active duty.
- 181 days in peacetime.
- 2 years in the post-Vietnam era
- 6 years in the Reserves or National Guard
- If your husband or wife is still alive
You can check your eligibility criteria by sending an online request to the DVA. If you have any experience working in the U.S. military, you may be eligible for a VA loan. VA loans are available to active duty service members, veterans, and reservists, and they allow you to get a new loan, even if your existing mortgage loan doesn’t have VA backing.
What Does the Process Look Like?
The process is quite similar to what you had come across while taking out the mortgage loan for your home. Here’s the process that you need to follow:
- Talk to a lender about your options and get pre-qualified. It is always best to compare the rates of 3 to 5 lenders so that you can get the best deal.
- Order a home appraisal from a VA-approved appraiser.
- Get a Certificate of Eligibility from the VA to prove you have eligibility for a cash-out refinance.
- Submit a loan application to your chosen lender along with your other supporting documentation.
- Next, go through underwriting. This involves providing documentation of your income, employment, and credit history.
- Wait for the lender to approve your loan and send you a loan estimate outlining the terms of the deal.
- If you agree to the terms, sign the loan documents and wait for the funding to be disbursed. Once the funds are available, you can use them however you see fit!
The IRRRL has reduced paperwork, but it’s still important to be aware of the documents you need. The cash-out refinance will require a credit check, proof of income and employment, and assets.
Some of the documents that you will require are as follows:
- A credit report
- Tax returns
- Bank statements
- Income documents
- Your current mortgage balance
- A new home appraisal
You may also have to show the list of debts that you want to pay with your loan, provided you use the cash-out funds to consolidate previous debts.
VA Cash-Out Refinance Loan Limits
Veterans who wish to purchase a home using a VA loan no longer have to worry about loan limits. Prior to 2020, the VA would only guarantee a certain amount of the loan, with veterans responsible for any amount above that limit. Now, however, the entire loan can be guaranteed by the VA, making it easier for veterans to obtain the financing they need.
If you’re a veteran with a VA loan on your home, you may be able to take advantage of a new rule that allows you to do a cash-out refinance.
With this type of refinancing, you could get a new loan for the full value of your home, minus its closing costs. So if your home’s value is $700,000 and you owe $500,000 in 2022, you can take out a VA cash-out refinance loan for up to $700,000. The difference of $200,000, less the closing cost, will be handed over to you and you can spend it on anything you want.
Selecting VA Cash-Out Lenders
How do you choose the right lender for your VA cash-out loan? Here are a few steps you can follow to find the best lender for your needs:
Check to see if the lender offers competitive interest rates
You don’t want to end up with a higher interest rate than necessary, so compare rates from multiple lenders before making a decision.
Ask about fees
Some lenders charge higher fees for a VA cash-out loan than they do for a traditional refinance, so be sure to ask about this upfront.
Make sure the lender is experienced in handling VA loans
You want a lender who understands the process and can help make things go smoothly.
Remember, there are two types of VA refinance loans
Cash-out and no-cash-out. The interest rate on a cash-out refinance loan is usually slightly higher than the interest rate on a no-cash-out refinance loan. However, you may be able to find a lender who will give you a good deal on a cash-out refinance loan. When shopping for a lender, don’t forget to compare rates and fees to get the best deal possible.
Make sure that the lender allows you to take full advantage of the cash-out benefits
It is possible to withdraw the entire home equity using this loan; so don’t hesitate to explore your options while talking to the lender.
How Can You Utilize Your Newly Accessed Funds?
Some common uses for the loan proceeds include consolidating debt, paying for home improvements, or funding a child’s education. One of the benefits of this loan is that it can help veterans to improve their financial situation by consolidating multiple debts into one manageable payment.
The VA cash-out amount can be used to pay off and refinance any loan type, making it a versatile option for those looking to lower their monthly payments or get out of debt. Here are some of the reasons why most people take out a VA cash-out loan:
1. Use The Loan Proceeds to Pay Off Mortgage Insurance
Mortgage insurance is a necessity for anyone who doesn’t have 20% equity in their home. But once you do have 20% equity, you’re likely wondering how to get rid of mortgage insurance. A cash-out refinance may be the answer.
A cash-out refinance occurs when you refinance your mortgage for more than you currently owe and take the difference in cash. Because a cash-out refinance essentially involves taking out a new mortgage, it allows you to avoid the hassle and expense of private mortgage insurance (PMI). And because you’re only paying interest on the portion of the loan that’s above your 80% LTV ratio, a cash-out refinance can also help you save on interest charges – another reason it’s worth considering if you’re looking to get rid of mortgage insurance.
2. Pay Off Other Loans
You can use your VA refinance loan to pay some of the following loans:
- Adjustable-rate mortgages
- Judgment or tax liens
- Construction liens
- Bridge loans
- Any loan requiring mortgage insurance
- Piggyback loans including a combo of first and second mortgages
- Standalone second mortgage
- Interest-only loans
- A loan with a high interest rate
Regardless of the type of loan you already have, you can pay it off using the money you receive from your VA loan. You can use a refinance calculator to get an estimate of the amount you are eligible for.
3. Refinance Your High-LTV Mortgage for a Lower Interest Rate
Homeowners with a high loan-to-value (LTV) on their mortgage may be looking for ways to lower their monthly payments. One option is to refinance at a lower rate, and the VA cash-out program allows homeowners to do just that. For example, you are a veteran and have a non-VA loan of $200,000. The interest rate is 6.5%. Suppose the home values drop. In this case, refinancing into a traditional loan might be out of the table.
That’s where you can play your VA refinance card. VA cash-out loans can be used to refinance your existing mortgage into a new one with a lower interest rate. In addition, the program allows homeowners to access up to 100% of their home’s equity. This can provide a much-needed financial cushion, especially for those with a high LTV.
4. Use The Money to Consolidate Other Debts
You can consolidate your mortgages and other debts once you get access to the cash. This type of refinance allows you to use the equity in your home to pay off other debts, including credit cards, car loans, medical bills, and student loans. Not only will this simplify your financial life by consolidating your payments into one monthly bill, but it may also save you money on interest over the life of the loan.
FAQs About a VA Cash-Out Refinance
Can you opt for cash-out refinancing from the VA?
Yes, VA cash-out refinancing allows eligible homeowners to access up to 100% of the equity in their homes. You can also choose to extend the term of your loan with cash-out refinancing, which can lower your monthly payments.
How does the loan work?
To be considered eligible for this loan, borrowers must first have a VA loan. Then, they can consult with a lender to determine how much equity they have in their home and how much cash they need to borrow. Once the borrower has been approved for the loan, they will work with their lender to close on their new mortgage. After the loan has closed, the borrower will receive the cash from their equity, minus any closing costs or fees associated with the loan.
Is it a good idea to take out a VA cash-out loan?
This type of loan opens the possibility of refinancing your existing mortgage and then taking out another loan. The loan amount can be as high as 100% of the equity in your home. This will provide a lump-sum amount of cash to meet immediate expenses. Moreover, these loans can be obtained with no closing costs.
What is the LTV ratio for this refinancing program?
The maximum loan-to-value (LTV) ratio is 100%, which means that homeowners can take out a loan up to the entire value of their homes. In some cases, borrowers may be able to obtain a higher LTV ratio if they agree to purchase private mortgage insurance (PMI). However, it’s best to consult with a lender before purchasing PMI.
What is Type 2 VA cash-out refinance and how does it work?
A Type 2 VA cash-out refinance occurs when you refinance your home to get cash back from the equity you’ve built up over time. The VA guarantees a portion of the loan, so this type of refinancing typically has lower interest rates than a conventional cash-out refinance. In addition, you won’t have to pay for private mortgage insurance (PMI) with a Type 2 VA cash-out refinance. You can borrow up to 90% of your home’s value.
What is the average closing cost?
It’s essential to understand that closing costs depend on the type of loan you are taking out and the lender you are working with. Closing costs can range from 2% to 5% of the loan amount. This means that on a $200,000 loan, you could end up paying anywhere from $4,000 to $10,000 in closing costs. While this may seem like a lot of money, it’s important to remember that closing costs are typically paid upfront, so they will not add any additional monthly payments to your loan.
How long will it take to receive my VA cash-out loan?
This loan typically takes longer to process than a traditional refinance. This is due to the extra step of having your home appraised in order to determine the new loan amount. However, the entire process can usually be completed within 40 to 55 days.
How much do I have to pay for the VA funding fee?
The DVA funding fee for a cash-out refinance is 2.3% for first-time users and 3.6% for subsequent users. The funding fee is added to your loan balance and is paid throughout the life of the loan.
Why should you use a VA cash-out instead of a Streamline Refinance?
A Streamline Refinance is a simpler process that can be completed with fewer documents and lower closing costs. However, it is still a better option because it allows you to access more of your home’s equity than a Streamline Refinance. Secondly, it can be used to pay off non-VA loans, whereas a Streamline Refinance can only be used to pay off existing VA loans. Moreover, the interest rate may be lower than the interest rate on a Streamline Refinance.
Will I require a new appraisal to qualify for VA cash-out refi?
Yes, you will require a new appraisal for your VA cash-out refinance. This is essential to determine the present value of your home.
Is it possible to take out a VA cash-out loan on an investment property?
While the VA loan program can be a great way to purchase an investment property, it does have some limitations. One of the most important things to keep in mind is that the loan can only be used for owner-occupied properties. This means that you cannot use a VA loan to purchase a property that you intend to rent out.
Is it possible to get a VA cash-out loan if I already have an FHA loan?
If you currently have an FHA loan, you may be able to refinance it into a VA cash-out loan.
Are there any restrictions on how I use my cash-out funds?
With the cash-out fund, you can renovate your kitchen, bathroom, or any other part of your home that needs an update. You can also use the funds to pay for necessary repairs, such as a new roof or plumbing repairs. If you have a number of high-interest debts, such as credit card debt or medical bills, you can use the cash to pay them off. This can save you money in the long run by reducing the amount of interest you’re paying.
Why is it not possible to get a VA cash-out loan in Texas?
The VA cash-out refinance loan is not available in Texas. This is because the home equity loan laws limit the maximum financing to 80% LTV. If your home’s equity is less than 20%, you will not be eligible for the loan.
Are the interest rates for VA cash-out loans lower than other refinance programs?
When it comes to rates, borrowers will find that they are generally lower than rates for other programs. This is because the VA has certain requirements in place that help to protect lenders from losses.
Will the VA cash-out loan lower my mortgage payments?
A VA cash-out refinance typically provides homeowners with access to lower interest rates, and in many cases, lower monthly mortgage payments.
Is it possible to use discount points on VA loans?
Discount points are a way to pay upfront interest on your loan in exchange for a lower interest rate. Buying discount points can be a good way to reduce your monthly payments if you plan to stay in your home for a long time. However, it does not make sense to buy points if you only live in your house for a few years, as you will not have enough time to recoup the cost of the points. Discount points can be used on VA loans, but it is important to compare the costs and benefits before making a decision.
Why are VA loans beneficial?
VA loans offer numerous benefits. Aside from down payment and PMI being out of the equation, you can also expect lower interest rates. They also don’t have a pre-payment penalty, so you can pay off your loan early without penalty.