Refinancing a mortgage can be a beneficial financial move for any homeowner. VA-eligible borrowers have unique refinancing options, including the VA cash-out refinance program.
VA cash-out refinance loans allow veterans to leverage their home equity by converting it into liquid cash. While this refinancing option presents several benefits, it’s essential to understand the complexities of this loan option before refinancing your mortgage.
Key Points:
- A VA cash-out refinance loan allows veterans to turn their home equity into liquid cash.
- This loan can be a good option for paying for emergency expenses, other debts, and home repairs.
- Borrowers must meet credit score, occupancy, seasoning requirements, and loan-to-value (LTV) limits to qualify for a VA cash-out refinance.
- Most other loan types (including non-VA loans) can be refinanced into a VA cash-out refinance.
- Like a standard VA loan, a VA cash-out refinance loan will come with closing costs, a VA funding fee (unless you’re exempt), and interest costs.
What is a VA Cash-Out Refinance Loan?
A VA cash-out refinance loan allows eligible veterans to refinance their existing mortgage loan and convert their home’s equity into cash. By doing so, homeowners can borrow up to 100% of their appraised value, allowing them to access these additional funds for personal use.
Example #1: 100% Cash-Out
A homeowner owes $100,000 on their home, which is currently appraised at $150,000. That homeowner could borrow up to $150,000 with a VA cash-out refinance.
This new loan would pay off their mortgage, leaving them $50,000 in cash. However, by taking out the maximum amount of $150,000, they effectively reduce their home equity from $50,000 (the difference between the appraised value and the current mortgage) to zero. This means that while they gain immediate access to $50,000 in cash, they lose the built-up equity in their home, which can impact their financial stability and property value.
Example #2: Partial Cash-Out
A homeowner owes $100,000 on their home, which is currently appraised at $150,000. Instead of borrowing the full appraised value, the homeowner takes out a $125,000 VA cash-out refinance loan.
This new loan pays off their existing $100,000 mortgage, leaving them with $25,000 in cash. In this scenario, the homeowner reduces their home equity from $50,000 to $25,000. While they still receive $25,000 in cash, they retain more home equity than taking out the total appraised value. This approach balances accessing needed funds and maintaining financial stability through retained equity.
By not taking out the maximum amount, the homeowner also potentially benefits from a lower interest rate and reduced monthly payments compared to a higher loan amount, further contributing to their overall financial health.
VA Cash-Out Refinance Benefits
The primary benefits of a VA cash-out refinance fall into three overarching categories: cash back, loan terms, and flexibility.
- Cash back: With a VA cash-out refinance, borrowers receive liquid cash that can be used to fund other needs, such as debt repayment, home improvements, emergency expenses, or funding college education costs.
- Loan terms: A VA cash-out refinance may provide access to better loan terms, including lower interest rates and potentially lower monthly payments.
- Flexibility: VA cash-out refinancing allows VA-eligible homeowners to refinance most loan types into a VA loan, rework an adjustable-rate mortgage, or eliminate mortgage insurance from another kind of loan.
VA Cash-Out Refinance Requirements
Qualifying for a VA cash-out refinance is similar to qualifying for a VA loan, with requirements including:
- Eligibility: Applicants must meet the VA’s eligibility requirements and obtain a Certificate of Eligibility (COE). The COE can be obtained through the VA or with the assistance of a VA-approved lender.
- Credit score: While there is no set credit score requirement for VA cash-out refinance loans, many VA lenders will look for a minimum credit score of 620 or higher.
- Occupancy: Borrowers must intend to occupy the refinanced property as their primary residence.
- Debt-to-income (DTI) ratio: This ratio compares the borrower’s monthly debt obligations to their gross monthly income and helps lenders assess their ability to manage a new loan. While there is no specific DTI requirement for VA cash-out refinance loans, veterans may need to meet additional financial guidelines if their DTI ratio exceeds 41%.
However, unlike a traditional VA loan, the borrower must meet the following to be eligible for a cash-out refinance:
- Loan seasoning: Loan seasoning is a required set number of consecutive, on-time payments for an existing mortgage before qualifying for a refinance. While requirements usually vary by lender, a six-month minimum is the current standard.
- Recoup Time: Homeowners may need to meet specific guidelines on how long it will take to recover the refinancing costs based on the savings achieved with the new loan.
VA Cash-Out Refinance Rates for 2024
Interest rates for VA cash-out refinance loans can change daily based on market conditions, so it’s important to stay updated on current rates to make informed decisions about your cash-out refinance.
The following chart provides an overview of the current VA refinance interest rates and annual percentage rates (APRs):
| Product | Rate | APR |
|---|---|---|
| 15-year Fixed VA Refinance | 5.82% | 6.05% |
| 30-year Fixed VA Refinance | 6.25% | 6.41% |
How we source rates and rate trends
How to get a VA Cash-Out Refinance
You can obtain a VA cash-out refinance loan by following these steps.
- Determine Your Eligibility: Make sure you meet all the requirements to qualify for a VA cash-out refinance loan.
- Assess Your Financial Situation: Review your credit score (generally, aim for at least 620), calculate your debt-to-income (DTI) ratio (generally below 41%), and determine your home equity and Loan-to-Value (LTV) ratio. A VA-approved lender can also help you determine these numbers.
- Gather Necessary Documentation: Collect pay stubs, tax returns, and employment verification, and have your current mortgage statements and property information ready.
- Find a VA-Approved Lender: Research lenders experienced with VA loans and get pre-qualified by providing basic financial information.
- Apply for the Loan: Complete and submit the loan application with your chosen lender and provide all required documentation.
- Appraisal and Underwriting: The lender will order a VA appraisal to determine your home’s value and review your application and financial information.
- Review Loan Terms: Review the loan estimate, including loan amount, interest rate, monthly payment, and closing costs, and compare offers if you applied with multiple lenders.
- Close the Loan: Sign the closing documents and pay any closing costs (some can be financed into the loan).
- Receive Funds: After closing, loan funds will be disbursed, and you will receive any cash-out funds.
- Manage Your New Loan: Start making monthly payments on your new loan and monitor your loan balance and interest rate.
Other Factors to Consider for Your VA Cash-Out Refinance
While a VA cash-out refinance can offer significant advantages, there are important considerations you should be aware of to prepare yourself for the cash-out refinancing process:
Closing Costs and Loan-to-Value (LTV) Ratio
VA cash-out refinancing comes with closing costs just like other home loans, including appraisal fees, origination fees, and title insurance. However, unlike the IRRRL/Streamline refinance option, VA cash-out refinance loans don’t allow borrowers to roll these expenses into their loan amount.
If you’re withdrawing enough cash, some lenders may allow you to use a portion to cover your closing costs as long as your loan stays within the required loan-to-value (LTV) ratio. The LTV ratio measures the borrower’s total loan amount against the appraised value of their home, so financing the closing costs of your cash-out refinance loan will result in a higher LTV ratio.
VA lenders consider borrowers with higher LTV ratios more risky, so financing your closing costs could impact your loan terms. LTV ratio guidelines will vary by lender, so it’s helpful to work with your lender to see how financing your closing costs could impact your VA cash-out refinance loan.
Interest rates are another consideration. A cash-out refinance is a new loan, which means homeowners will be subject to current market rates.
VA Cash-Out Refinance Funding Fee
One element of VA cash-out refinance loan closing costs that differs from other non-VA refinancing options is the VA funding fee. The funding fee is a one-time payment required by the Department of Veterans Affairs (VA) for most VA loans, including cash-out refinances. This fee helps offset the costs of the VA loan program and allows it to be self-sustaining.
The specific amount of the VA funding fee varies but typically ranges from 0.5% to 3.3% of the loan amount. For veterans using their VA loan benefit for the first time, the funding fee on a cash-out is 2.15% of the loan amount. Homeowners pay 3.3% if they’ve used the loan benefit before. It’s important to consult your VA lender to determine your exact percentage or if you are eligible for an exemption from the funding fee requirement.
Although the VA funding fee is an added cost, it is generally much lower than the extra costs associated with non-VA refinancing options, such as private mortgage insurance (PMI) and other fees.
VA Cash-Out Refinance Seasoning Requirements
The seasoning period of a loan refers to the amount of time a borrower has held that specific loan. Lenders typically require a seasoning period of 210 days, meaning borrowers must have owned their home for at least 210 days beyond their first monthly mortgage payment to qualify for a VA cash-out refinance.
Restrictions for Texas Residents
If you are a homeowner in the state of Texas, it’s important to note that there are state-specific restrictions on VA cash-out refinance loans. Texas laws limit the available options when it comes to cash-outs, and the VA Cash-Out Refinance is not excluded from its restrictions.
If these restrictions apply to you, you’re still able to seek out other mortgage refinancing options, such as VA Streamline refinance loans.
VA Cash-Out Refinance Alternatives
If you’re considering accessing your home equity but want alternatives to a VA cash-out refinance, here are some options:
Home Equity Loan
A home equity loan allows you to borrow a lump sum of money against the equity in your home. The loan amount is repaid over a fixed term at a fixed interest rate.
Advantages:
- Fixed interest rates with predictable payments.
- Lump sum of cash for large expenses.
- Potential tax-deductible interest.
Disadvantages:
- Adds a second mortgage payment.
- Usually has higher interest rates than first mortgages.
- Reduces home equity.
Home Equity Line of Credit (HELOC)
A HELOC is a revolving line of credit secured by your home, allowing you to borrow as needed up to a certain limit and repay it over time.
Advantages:
- Interest only on the amount drawn.
- Flexible borrowing and repayment.
- Usually has lower interest rates than other credit types.
Disadvantages:
- Variable interest rates can lead to unpredictable payments.
- Reduces home equity.
- May incur annual fees.
Cash-Out Refinance (Non-VA)
A non-VA cash-out refinance replaces your existing mortgage with a new one that combines the amount you wish to cash out into one loan.
Advantages:
- Usually has lower interest rates than personal loans or credit cards.
- Combines mortgage and cash-out amounts into one loan.
- Potentially tax-deductible interest.
Disadvantages:
- Substantial closing costs.
- Extends mortgage term.
- Reduces home equity.
Reverse Mortgage
Available to homeowners aged 62 and older, a reverse mortgage allows them to convert part of their home equity into cash without selling the home or taking on an additional monthly payment.
Advantages:
- Provides a source of income in retirement.
- No monthly mortgage payments required.
- Loan is repaid when the homeowner sells the home, moves out, or passes away.
Disadvantages:
- Reduces home equity.
- Interest and fees can accumulate quickly.
- Can affect eligibility for certain government benefits.
More Reading
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Should You Refinance VA Loan from 30 Year Mortgage to 15 Year?
VA Loans Refinancing Pros and Cons
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