VA Cash-Out Refinancing Loans: Good Or Bad Idea?
VA Cash-Out Refinance loans are an option for those who qualify for the VA home loan program. This refinance loan option can be used to refinance any mortgage whether VA or non-VA into a VA home loan with cash back to the borrower at closing time. VA cash-out refi loans are different from other government-backed refinance loans like FHA mortgages.
Why? Because you can refinance up to 100% of the home’s value rather than being limited by a loan-to-value ratio of 85% the way FHA cash-out loans are structured. These VA loans also have no mortgage insurance requirement and no early payoff penalties are permitted.
VA Cash-Out Refinance Loan Basics
In order to apply for a VA Cash-Out Refinance, you must be eligible for the VA loan program with minimum time in service and/or other criteria that make you eligible for a VA home loan. These VA refinance loans can be used for a current or delinquent mortgage and may be used for both VA and non-VA mortgages.
Cash proceeds from the loan can be used to pay its fees and you can also purchase discount points with a VA Cash-Out loan. You must have “sufficient entitlement” remaining to use on this VA refi loan. If you are using it to pay off an existing VA mortgage, your entitlement will be restored as part of the transaction. Ask your loan officer how to apply for restoration of VA loan entitlement as part of a VA-to-VA refinance loan.
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VA Cash-Out Refinancing requires a new credit check and your lender will need to establish the current fair market value of the property with a new appraisal. You will require a new appraisal for VA Cash-Out loans regardless of when you purchased the property.
You are not required to use the same lender that issued your existing mortgage. It’s important to shop around for a VA mortgage loan and a lender who will work with your circumstances. No two home loan situations may be exactly the same and some lenders have more flexibility than others when it comes to credit qualifying issues and related concerns. When looking for a new lender, be sure to go back to the loan servicer you currently have to see if they will match or beat another lender’s rates / terms.
VA Cash-Out Refinance loans require mortgage insurance, and the loan must be the “first lien” and cannot be written as a “subordinate lien”. You are required to recertify occupancy as a condition of loan approval and you are not allowed to use a VA Cash-Out Refinance on an investment property.
VA Cash-Out loans can be written for 30 years, with a maximum loan term of 30 years and 32 days.
When Is It A Good Idea To Apply For VA Cash-Out Refinancing?
Some borrowers want to use a cash-out refinance loan to pay off or consolidate debt, others may wish to finance home improvements with a VA Cash-Out Refinance. The key to making the most of the new loan is to calculate how much you will pay in closing costs, fees, etc., and see how much you are spending to get the new loan.
Does the cost of the loan outweigh the benefit? For example, if you are planning a kitchen remodel and want to pay for it with the proceeds of your VA mortgage, you will want to examine the cost to value ratio of that project. How much would you recoup on the remodeling job if the home were sold? Is the expense of the upgrade worth it?
Of course, the answer to that question depends greatly on whether your motivation to remodel has more to do with enjoying your home as opposed to selling it.
You may not recover 100% of the cost of the project if the home is sold, so if your goal is to get a dollar-for-dollar increase in the value of the house thanks to the money spent on the project you may be disappointed.
A cash-out refinance loan is a good option for those who have run the numbers and find the cost of the loan, the return on investment, and the overall necessity of the project acceptable. The same is true for certain kinds of debt consolidation. If your goal is to get a single loan to manage a number of smaller bills, the VA loan program’s generally more forgiving credit qualification guidelines make it possible to get a lower interest loan to wipe out those debts. But the nature of your debt is key.
Are you paying off student loan debt that is not likely to be run up again? That’s a smart use of cash-out refi money. What’s not so healthy for your budget and bottom line?
When Is It A Bad Idea To Apply For VA Cash-Out Refinancing?
In general, it’s a bad idea to use a VA Cash-Out Refinance loan to pay off debts you have a likelihood of getting into again. Paying off a credit card account you still use with the cash-out loan proceeds is risky. How would it feel to completely pay off your credit card with such a loan, only to find that the card has been used again until you owe a significant balance on it and your refinance loan?
Using a refinance loan to pay off any debt likely to recur is not advisable. Paying off one-time expenses is a better use of the cash. The same is true for some types of home improvements. We mentioned them above in the context of good things you can do with a cash-out loan, but there are home improvement projects that may not actually add any value to your home. If that’s what you want–improvements that suit the owner but not necessarily a potential buyer–there’s no issue.
But if you want specific upgrades to add value to the home, it’s best to consult an expert to determine which improvements are worth taking out a refi loan for. Repairing and recovering from a natural disaster is one thing, but if you want to add a “mother-in-law apartment” over a garage and use a VA Cash-Out Refinance Loan to do it you may wish to see whether that specific improvement adds any value overall. You may be surprised to learn which projects are discouraged for the purposes of raising property values.
What You Should Know About These Loans
Some applicants have more of an advantage than others. If you receive or are eligible to receive VA compensation for service-connected medical issues, you may qualify for a waiver of the VA Loan Funding Fee, which can potentially save thousands of dollars. That’s an advantage when applying for a VA loan…any savings on your upfront costs is good to consider.
Add to that the fact that a VA Cash-Out Refinance loan has no mortgage insurance requirement (compare that to FHA Cash-Out Loans which do require both an up-front premium and monthly mortgage insurance premium) and it’s easy to see there are some advantages to the VA version of this refinance option.
Still not sure about your options? Ask a participating lender compare both VA and non-VA refinance loan options side by side for you. This can help you see what costs might affect your budget for a specific type of option. It never hurts to make a more informed decision and doing a comparison is a smart way to learn more about the different refinance loan types open to you.
Not all lenders are participating VA lenders, but those who are can show you the differences between each refinance product they offer. Also, it’s good to keep in mind that not all participating VA lenders offer the same loan products. You may have better luck with some lenders for the type of VA mortgage you seek than with others.
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- VA Refinance Loan Basics
- Getting Started With VA Loan Benefits
- What is VA Streamline Refinancing and How Can It Benefit You?
- VA Loans, Investment Properties, and Deployments
- The VA Loan Certificate of Eligibility
- VA Loan Limits