September 16, 2022
6 Things to Know About a VA Cash-Out Refinance
The Department of Veterans Affairs (VA) cash-out refinance combines two sought-after mortgage opportunities: the VA’s home loan benefits and access to your home’s equity. But is it a good choice for you? Find out the basics about this VA refinancing option before you decide.
A VA cash-out refinance replaces your current home loan with a new mortgage that has a different rate and term – and comes with a lump sum of funds at closing. You can use the cash however you wish, such as funding home improvements, paying off debt, or buying an investment property. That money comes from your home equity, so your new loan will be higher than your current one.
Like all VA loans, the VA cash-out is backed by the U.S. government. That means it has unique benefits only available to eligible veterans, servicemembers, and surviving spouses.
Here are a few of the reasons a VA cash-out loan can be an appealing refinance option:
When it comes to the amount of equity you can access, a VA cash-out is more lenient than a conventional cash-out. The VA allows you to take out up to 100 percent of your home’s value. Many lenders will approve up to just 90 percent, but even that is higher than the standard conventional guideline of 80 percent.
Interest rates for cash-out refinances are typically higher than for refinances that don’t include cash because they come with added risk. Fortunately, VA cash-out rates are usually lower than conventional cash-outs because they are government backed. They also have other VA loan benefits such as no mortgage insurance.
The VA also offers an interest rate reduction refinance loan (IRRRL). Unlike the IRRRL, which requires you to already have a VA loan, the cash-out is available even if you currently have a different mortgage type. It's a way to use your VA loan to access your home equity.
You can get a cash-out refi if you meet these four requirements:
As mentioned, you don’t need to have a VA loan currently in order to refinance with a VA cash-out. The standards differ based on the type of mortgage you have.
- If you currently have a VA loan – You’ve made at least six consecutive payments or waited 210 days
- If you don’t currently have a VA loan – Meet the requirements to obtain a VA certificate of eligibility (COE)
The only way to access cash at closing is to have home equity. You build equity by paying down your mortgage principal and as your property value increases naturally over time or through home improvements.
While some lenders may allow you to access 100 percent of your equity for a VA cash-out, that isn’t always in a borrower’s best interest. Instead, it’s common to use a loan-to-value ratio (LTV) to help determine how much you can borrow and get at closing. LTV is a percentage of your loan amount to the home’s current value.
Here’s an example of a VA cash-out using up to 90 percent LTV:
- $300,000 home value
- $100,000 equity
- $200,000 current mortgage
- $300,000 x .09 = $270,000 maximum new loan amount
- $270,000 - $200,000 = $70,000 maximum cash-out
Being eligible is different from qualifying for a VA refinance. To get approved for a loan, you must meet the financial standards set by both the VA and your lender. That includes:
- Credit history – The VA doesn’t set a minimum credit score, but most lenders prefer 580 or higher
- Consistent income – Proof of income tthrough documentation such as pay stubs, W2s, tax returns, and business profit-and-loss statements
- Debt-to-income ratio (DTI) – The ratio of your monthly debt payments to gross income is 41 percent or lower; compensating factors can help if yours is lower
- On-time loan payments – Proof you’ve paid your current loan on time the past 12 months
- Property condition – An updated appraisal to determine the current value of your home and ensure it meets the minimum property requirements (MPRs), ensuring it’s safe, sound, and sanitary
- Primary residence – VA loans are intended for primary residences and not investment properties
4. Cash-out VA refinance rates
As with any mortgage, a low rate doesn’t always mean a better deal. It’s important to take into account the VA funding fee and closing costs.
Because VA loans are backed by the government, the ones funding the loans ultimately are U.S. taxpayers. The VA funding fee is a one-time fee paid by the borrower that helps lower the cost of the loan to taxpayers.
Your VA cash-out funding fee is calculated by a percentage of the total loan amount. The percentage varies whether it is your first use or a subsequent use.
- First use – 2.3%
- Subsequent use – 3.6%
Closing costs on VA loans are similar to those you’d find on conventional and FHA mortgages because many of the same activities occur: credit check, loan underwriting, title and record filings, appraisal, inspections, and more. You can typically expect to pay 2 to 5 percent of the loan amount.
Before refinancing and digging into your hard-earned equity, take time to think through whether it is worthwhile. Here are some questions to consider:
- Can you refinance for a lower rate than you currently have?
- Does the refi allow you to get rid of other costs like mortgage insurance?
- Are you comfortable increasing your loan principal and possibly the loan term?
- Have you added up the costs and know how long it will take to break even?
- Do you plan to use the cash to add value to your home?
If you answered yes to multiple points, a VA cash-out is likely worthwhile.
You may also like: Is a cash-out a smart financial move?
The best VA-approved lender will offer more than great rates. Look for someone with vast experience and a passion for serving military families.
To learn more about PenFed loans or what loan is right for you: