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MORTGAGE KNOWLEDGE CENTER

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REFINANCE LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

  1. Home
  2. Mortgage Knowledge Center
  3. What Is a VA Cash-Out Refinance?

MORTGAGE

What Is a VA Cash-Out Refinance?

What You'll Learn: Max LTV on VA cash-out, refi requirements, Texas guidelines, and closing costs

EXPECTED READ TIME: 6 MINUTES

July 11, 2023

What Is 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.

Intro to VA cash-out refi 

A VA loan cash-out refinance replaces an existing 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, a VA cash-out refinance loan is backed by the U.S. government. That means it has unique benefits that are only available to eligible veterans, servicemembers, and surviving spouses.

Benefits of a VA cash-out refi

When eligible homeowners choose a VA cash-out refinance. It’s often for benefits like these:

Access to more cash

When it comes to the amount of equity you can access, a VA refinance with cash out is more lenient than a conventional cash-out refi. The VA allows you to take out up to 100% of your home’s value. Many lenders will approve up to just 90%, but even that is higher than the conventional standard of 80%.

Competitive interest rate and fees

Because cash-out refinances come with added risk compared with non-cash refis, they often can come with higher interest rates. Fortunately, VA refinance cash-out rates are usually lower than conventional cash-out rates because they are government backed. They also have other VA loan benefits such as no mortgage insurance.

No need for an existing VA loan

Unlike the VA interest rate reduction refinance loan (IRRRL), which requires you to already have a VA loan, a cash-out refi is available regardless of the type of mortgage you used to buy your home. This provides a way to use your VA loan entitlements to access your home equity, even if you didn’t purchase your home with a VA loan.

Eligibility and guidelines

VA cash-out refinance guidelines include five requirements:

1.    You already have or are eligible for a VA loan

As mentioned, you don’t need to have a VA loan currently in order to refinance with a VA cash-out refi. 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 and must be seasoned 210 days.

●      If you don’t currently have a VA loan – Meet the requirements to obtain a VA certificate of eligibility (COE).

2. You’ve built equity in your home

The only way to access cash at closing is to have home equity. You build equity by paying down your mortgage principal and with increases in property value.

Technically, VA loans allow for a maximum loan-to-value (LTV) of 100 percent. This means, for example, that if your home’s appraised value is $500,000, you could potentially borrow $500,000. While some lenders may approve a 100 LTV VA cash-out refinance, it’s more common to use a 90% LTV. Let’s break that down:

Home Value

$600,000

Equity

$200,000

Current Mortgage

$400,000

Maximum New Loan Amount

$540,000 ($600,000 x .9)

Maximum Cash Out

$140,000 ($540,000 – $400,000)

In this example, the new loan replaces the existing mortgage and provides an additional $140,000 in cash.

3. You meet the financial requirements

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 standard, but most lenders prefer a minimum credit score for a VA cash-out refinance of 580 or higher.
  • Consistent Income – Proof of income through 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% or lower.
  • On-Time Loan Payments – Proof you’ve paid your current loan on time the past 12 months.

4. Your property meets VA loan requirements

  • Property Condition – You’ll need 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.

5. You don’t live in Texas

A VA cash-out in Texas works differently from cash-outs in other states. There, all cash-out refinances must adhere to both the Texas Constitution and VA underwriting guidelines, prohibiting veterans in that state from taking any equity out of their homes with a VA loan.

Costs of a VA cash-out refinance

When comparing loan types, it’s important to look at the costs beyond interest rates. One significant cost to consider is the VA cash-out funding fee, which will vary depending on the loan amount and whether it’s your first or a subsequent use: 

First Use

After First Use

2.15%

3.3%

Source: VA.gov

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. 

For example: If this is your second VA loan and the amount is $500,000, your VA funding fee could be $16,500. It would be $10,750 if it’s your first use of the VA home loan program. That can sound like a hefty upfront expense, but some VA closing costs – including the funding fee – can be rolled into the loan. And some borrowers are exempt from the funding fee.

Final thoughts

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 refi is likely worthwhile. To find the best VA lender, look for someone with vast experience and a passion for serving military families.

Want more helpful resources? Visit our VA loan hub in the Mortgage Knowledge Center.

 

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

SIMILAR ARTICLES

Requirements of a VA Loan Refinance | PenFed Credit Union

VA loan requirements cover everything from credit score to income and property condition. Know what's important when you're applying for a VA home loan.

house with american flag

Benefits of Refinancing With a VA Streamline Refinance | PenFed Credit Union

VA home loans have many benefits, but a streamline home loan (IRRRL) offers even more reasons why a VA mortgage may be your best option. Find out more.

calculator and mortgage rates

VA Fixed-Rate vs. VA Adjustable-Rate Mortgage | PenFed Credit Union

What type of VA loan is right for you – a fixed-rate or adjustable mortgage? There are benefits to both. Discover your options so you can decide which mortgage is your best choice.

home improvements

Who Is Eligible For a VA Refinance? | PenFed Credit Union

Considering a VA refinance? Discover who can get one, what's needed, and the rules for surviving spouses. Read on for more.

Someone on tablet looking at home improvements.
image

REFINANCE LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.

*Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of December 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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The content you are about to view is produced by a third party unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Realty, LLC, see the Affiliate Business Arrangement Disclosure.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party Website.


The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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