Like a home equity loan or a home equity line of credit (HELOC), a VA cash-out refinance offers eligible borrowers the opportunity to access the equity they’ve accumulated in their property. This type of loan allows qualified veterans to utilize the proceeds from their refinanced mortgage for any purpose they desire, from home renovations to paying off other debts.
Whether you're already searching for the best VA loans or just starting to look into your options, understanding how VA cash-out refinancing works is essential to making the right decision. In this detailed VA cash-out refinance guide, we'll cover exactly what these loans are, their advantages and disadvantages and the steps you need to take to apply for one.
Read on to learn if a VA cash-out refinance is the right choice for you.
What is a VA cash-out refinance loan?
VA loans are a special kind of mortgage loan backed by the government and made available to veterans, service members and eligible surviving spouses. These loans are specifically designed to assist veterans in purchasing homes with minimal or no down payment at comparatively lower interest rates. Furthermore, they don't require private mortgage insurance, come with no prepayment penalties and have significantly lower closing costs compared to conventional mortgages.
A VA cash-out refinance loan is a refinancing option that allows you access the equity you've built up in your home. This type of loan differs from a traditional rate-and-term refinance or interest rate reduction refinance loan, which replace your current loan with a new loan at a lower interest rate, different monthly payment or different term length.
While these changes may also occur with a cash-out refinance, the primary goal of this loan is to access cash from the equity available in your home. VA cash-out refinance loans can be used to refinance existing VA loans as well as non-VA loans.
How does a VA cash-out refinance loan work?
When you take out a VA cash-out refinance loan, you're replacing your current loan with a new one and taking out cash from the equity you’ve built in your home over time. The equity you receive in cash is added to the principal of the new loan and your total mortgage amount increases. You'll then begin making payments on the new loan, which may have a different interest rate than your current one.
You're generally responsible for paying the VA funding fee, various lender fees and closing costs. Some lenders allow these costs to be rolled into the loan, meaning they'll become part of the principal balance instead of having to be paid out of pocket.
To calculate the equity you have in your home, lenders typically use the loan-to-value ratio (LTV). This is the ratio of your loan amount to the appraised value of your home. VA cash-out refinances allow LTV ratios of up to 100% (the maximum guaranteed by the VA) or 90%, depending on the lender.
For example, if you had a home loan of $400,000 and have already paid $200,000 toward it, you'll be able to receive up to $200,000 in cash less any fees and closing costs. Of course, this assumes the appraised value of your home is still $400,000. Large changes in your home's value that have occurred since the time of purchase will affect the amount of cash you'll be eligible to receive.
The following sections examine the main eligibility criteria and requirements borrowers must meet in order to qualify for a VA cash-out refinance loan.
VA cash-out refinance guidelines
While some requirements vary by lender, the following are some of the general expectations for borrowers looking to qualify for a VA cash-out refinance:
- Minimum credit score of 640
- Debt-to-income ratio of 41% or less
- Proof of income and/or employment
Borrower qualifications and eligibility requirements
Aside from some of the aforementioned lender-specific requirements, there are some general eligibility guidelines required by the U.S. Department of Veterans Affairs in order to qualify for any VA loan. You may qualify for a VA loan if you meet one or more of the following criteria:
- You served in the U.S. military for at least 90 days during wartime or at least 181 consecutive days during peacetime (active duty).
- You served at least six years in the reserves or National Guard, or served 90 days (at least 30 of them consecutively) under Title 32 orders.
- You are a spouse of a veteran who died in the line of duty or from a military service-connected disability.
Additionally, VA loans can only be used for homes that borrowers intend to occupy as their primary residence within 60 days of closing the loan. Borrowers looking to purchase or refinance a second home or investment property will have to apply for a non-VA loan.
Loan-to-value limits and calculations
The LTV is your current loan amount divided by the home's appraised value. Returning to the prior example, if you currently have $200,000 left on your mortgage and the home appraises for $400,000, your LTV ratio is 50%.
While some mortgage lenders allow for LTV ratios of up to 100% for cash-out refinance loans, other lenders limit this to 90%. The following table demonstrates an example of how VA cash-out refinance loan limits are determined.
|Appraised home value||$400,000|
|Current mortgage balance||$200,000|
|Maximum new loan amount||$400,000|
This is a somewhat simplified calculation as the loan process also involves lender fees, the VA funding fee and closing costs that may alter the maximum amount of cash available from your refinance.
Advantages of a VA cash-out refinance
Beyond the perks of VA loans — like no money down, competitive interest rates and so forth — there are a number of advantages to VA cash-out refinance loans. The following section details those benefits.
Access to home equity
While typical cash-out refinance loans cap the amount of equity you can pull out of your home, one of the defining features of a VA cash-out refinance is the ability to access up to 100% of your home's equity. For many borrowers, this is the largest source of capital available to them. VA cash-out refinances are also much less restrictive than other kinds of home equity loans.
Debt consolidation and financial flexibility
The added liquidity from a VA cash-out refinance makes it an attractive option if you're looking to consolidate debt. By eliminating multiple payments, VA cash-out refinances can free up much-needed funds and help you organize finances into one manageable payment with comparably low-interest rates.
Funding home improvements or repairs
VA cash-out refinances are also a great choice if you need to cover costly home repairs or home improvement projects. Whether you need to replace your roof, update the HVAC system or add a deck to your backyard, VA cash-out refinance loans can provide the necessary funds without you having to take out an expensive, high-interest loan.
Another noteworthy benefit of VA cash-out refinances is the potential to use the new capital for various investments such as stocks, new businesses or even another property. Depending on the investment, this is perhaps the most risky use of the cash-out funds you can choose. As such, it’s important to consider the risks and rewards of any investment before committing funds from a VA cash-out refinance to it.
VA cash-out refinance vs. VA loan
VA cash-out refinances are distinct from VA loans. While a VA loan is used for purchasing a home, VA cash-out refinances are used to access the equity of your current property. In some cases, borrowers also use VA cash-out refinances to simultaneously tap into their home equity while refinancing from a non-VA to a VA loan.To learn more, here are five tips for getting the best VA loan rate.
Applying for a VA cash-out refinance loan
Just like any other type of loan, you'll need to work through several steps — including research, preparation and application — when obtaining a VA cash-out refinance loan. The following section describes what you can expect.
Researching VA-approved cash-out refinance lenders
Before contacting any lenders, it's essential to research which institutions are VA-approved cash-out refinance lenders. These lenders have met specific criteria from the U.S. Department of Veterans Affairs and are authorized to offer VA loans. Lenders that offer VA loans typically feature them prominently in the loan product sections of their websites.
Checking your credit and gathering the necessary documentation
Prior to applying for a VA cash-out refinance loan, you'll want to check your credit score before you begin to gather any necessary documents. If you’re wondering how to do that, read our guide on how to check your credit report.
After checking your credit and ensuring that there are no incorrect items on your report, begin to collect your documentation, including bank statements, proof of income, tax returns and any other documentation a lender will likely want to review. Collecting these materials ahead of time will speed up the loan process.
The appraisal process and property evaluation
Once you’ve applied for your VA-approved cash-out refinance, the next step is a home appraisal. An independent third-party appraiser will arrive at an estimate through careful analysis of several criteria, including the following:
- Size and location
- General condition of both home and overall property
- Any notable damage
- Quality of building materials
- Sales of similar nearby homes (comps)
- Types of amenities (indoor and outdoor)
- Renovations and updates completed
- State of core systems (e.g., electrical systems, plumbing systems, etc.)
The purpose of the appraisal is to establish an estimate for the current market value of your home. When the appraisal is complete, the lender will make a decision regarding the maximum loan amount available.
Timeframe and potential closing costs
Closing costs on a VA cash-out refinance loan can vary. In addition to charging for the home appraisal, lenders may charge an origination fee, points and other fees associated with the refinance. Aside from the lender and third-party fees, the VA also requires a funding fee. This can range from 2.15% to 3.3%, depending on whether or not it’s your first use of a VA loan.
The length of the entire process — from application to closing — will vary depending on the lender and your unique circumstances. While some lenders list closing times between 30 and 45 days, other lenders state that they’re able to complete the process in just a few weeks. Borrowers should always shop around and compare different lenders' fees, closing costs and average loan turnaround times to ensure they are getting the best deal possible to match their needs.
Alternatives to a VA cash-out refi
In addition to a VA cash-out refinance, there are several other ways for you to tap into your home equity. Home equity loans are one option. These loans typically feature a fixed interest rate and a lump-sum payout that you can use for whatever purpose you choose.
HELOCs are another popular choice since they allow you to borrow as much or as little money as you need up to the amount approved in your line of credit. HELOCs are similar to credit cards, except the balance is secured by using your home as collateral. This typically results in interest rates that are significantly lower than those that come with credit cards.
Finally, personal loans are another option for those who don’t want to tap into their home equity. Personal loans are unsecured, meaning that no collateral is necessary. However, they usually come with higher interest rates than VA cash-out refinances and often have much shorter repayment terms.
Is a VA cash-out refinance a good idea?
Whether or not a VA cash-out refinance is the right choice for you depends on your personal situation. If you have enough equity in your home and stable income, a VA cash-out refinance may be a good option compared to other loan types due to its relatively low-interest rate, lower fees and flexible terms.
However, it’s important to note that you’ll be taking on additional debt, so you'll want to make sure you can comfortably afford potentially higher monthly mortgage payments. You should also consider any additional costs associated with mortgage loan refinancing, such as lender fees, third-party fees and the VA funding fee.
Summary of Money's guide to VA cash-out refinance
Available exclusively to veterans, active duty service members and eligible surviving spouses, VA cash-out refinances can be a strategic financial move for eligible borrowers looking to access their home equity. By understanding the guidelines, benefits, application process and alternatives, you can make an informed decision that aligns with your financial goals.
Whether you’re looking to consolidate your debt, fund home improvements or seize investment opportunities, a VA cash-out refinance can unlock the potential of your home's equity in a way that suits your needs and aspirations. As with any loan, potential costs and increased monthly payments should be weighed against the benefits of using a VA cash-out refinance before making a final decision.