A VA Cash-Out refinance loan gives owners the flexibility to put 100% of their home equity to work achieving financial goals.
It’s a common misconception that the sole purpose of the VA loan program is to help eligible service members and veterans become homeowners. Although a purchase loan is a popular use of VA benefits, it’s only one of several loan types available. For those who already own a home, a VA Cash-Out Refinance loan can be an incredibly powerful VA Refinance option for veteran home owners.
Homeowners who find themselves in need of a large amount of cash can quickly and easily tap into the value of their home. The equity that has been building in their home over time may be used for a wide variety of purposes, such as to consolidate debt, improve monthly cash flow, or pay for emergencies.
Benefits of a VA Cash-Out Refinance Loan
There are a number of reasons why a VA Cash-Out refinance loan might be beneficial for an eligible veteran.
· If the current loan requires the payment of Private Mortgage Insurance (PMI) premiums, refinancing with a VA loan will eliminate the expense.
· If the current loan has a higher or adjustable interest rate, the refinance can provide more favorable interest rate terms.
· Borrowers can use the cash from the loan to get out from under non-mortgage debt.
VA guidelines state that loan proceeds taken as cash by the borrower may be used “for any purpose acceptable to the lender”. This means there is wide latitude for how a borrower may use the additional cash. It may be used to pay off debt, taken as cash, or a combination of both.
100% Debt Consolidation
Credit cards, vehicle loans, and second mortgages have interest rates that are higher than a home mortgage. For homes with adequate equity, 100% of the borrower’s existing debt can be consolidated into the home loan with a VA Cash-Out loan. Not only will the interest rate on the debt be significantly lower, but monthly payments are also reduced, resulting in better monthly cash flow for the borrower.
Proceeds from a Cash-Out refinance may be used to:
· Pay off a second mortgage
· Fund home construction/Home repairs
· Pay for college expenses
· Pay medical bills
· Eliminate high-interest credit card debt
· Pay emergency expenses
· New vehicle purchase
· Invest in energy-efficient home upgrades
Tax-Deductible Interest
Interest payments made for a home loan are eligible for tax deductions. The interest paid for other types of debt is not. Paying off those financial obligations with a VA Cash-Out refinance transforms it into debt that is tax deductible.
VA Cash-Out Limitations
Much like VA purchase loans, there are some limitations associated with VA Cash-Out loans.
The VA guarantees loans that meet the conforming limits established by the Federal Housing Finance Agency (FHFA) without requiring a down payment. The 2019 conforming loans limit is $484,350 for most counties in the US, though higher cost of living locations may have higher limits.
Therefore a VA 100% Cash-Out loan needs to be at or below the conforming limit where the property is located. Any loan amounts higher than the conforming limit will require a down payment equal to 25% of the value, just as with a VA purchase loan.
VA 100% Cash-Out Refinance vs VA Refinance
Though both loan types have refinance in their titles, these loans have different purposes.
A VA refinance is also referred to as an Interest Rate Reduction Refinance Loan (IRRRL). As the name implies, this type of loan is used when the borrower would like to take advantage of better interest rates.
With the VA IRRRL program, the new loan amount can only be for the amount remaining on the existing mortgage plus some additional costs involved with the refinance. The VA
funding fee and allowable closing costs may be rolled into the new loan. However, with an IRRRL refinance, the borrower is not allowed to receive any cash.
For example: A borrower has an existing mortgage with an interest rate of 5% and $200,000 remaining. Under the IRRRL streamlined refinance, the new loan will be for $200,000 (plus any closing costs the borrower has decided to include in the loan) but with more favorable interest rate terms.
For a borrower to be eligible for an IRRRL, the current loan must also be a VA loan.
When opting for a VA Cash-Out refinance, eligible veterans can choose to refinance for an amount that is for more than what is remaining on the current mortgage.
The total amount financed with the new mortgage may be equal to the current appraised value of the home, or 100% loan-to-value (LTV). With this type of loan, the existing mortgage will be paid off in full and the borrower may use remaining proceeds for other purposes, even if unrelated to their home.
For example: This time the borrower would like to receive cash back from the refinance. The existing mortgage amount is $200,000, but the appraised value of the home is $300,000. With a VA 100% Cash-Out refinance, the new loan amount can be as high as $300,000. When the new loan is funded, $200,000 pays off the old loan, and $100,000 is given to the borrower.
With a Cash-Out VA refinance, the current loan does NOT need to be a VA loan. Conventional and FHA loans may be refinanced using a VA Cash-Out refinance loan.
Alternatives to a VA Cash-Out Refinance
There are alternatives, but each has its drawbacks. For eligible veterans, a VA Cash-Out refinance may be the smartest option.
Home Equity Loan
As mortgage payments are made and home prices increase over time, homeowners begin to see equity build in their homes. A common method for accessing this increased value is by taking out a home equity loan, also known as a “second mortgage”. With this type of loan, the borrower receives a lump sum of cash and makes payments on that loan over a fixed period of time.
Unfortunately, home equity loans can be costly. They generally have much higher interest rates than primary home loans, making it cost more in interest payments to access the home’s equity with this type of loan.
Home equity loan terms are generally for a much shorter period than with a primary home mortgage. Loan repayment periods may be as short as 5-15 years. Therefore, the monthly equity loan payment will need to be higher to compensate for the shorter time frame.
Conventional Refinance
Under a conventional refinance, borrowers would not be able to take out a loan for 100% of the home’s appraised value. Lenders want to borrowers to have a combined loan-to-value (CLTV) of at least 80%. With a conventional refinance, the combined value of the loan and cash proceeds to the borrower cannot be more than 80% of the home’s value.
For example: The value of the home is $200,000 with a current mortgage of $150,000. In order to maintain an 80% CLTV, the refinance loan cannot be for more than $160,000. $150,000 would go to pay off the existing mortgage and only $10,000 would be available for the homeowner’s use.
Borrowing more than 80% of the home’s value will require the addition of PMI.
Why Choose a VA Cash-Out Refinance Loan
VA loan benefits offer several advantages over the alternatives. A VA Cash-Out refinance is not a home equity loan, nor is it subject to the same CLTV rules that a conventional refinance is.
· The entire value of the home and cash received by the borrower is all in one loan, with just one monthly payment.
· The entire amount of the loan is subject to the same low VA mortgage rate.
· 100% of the home’s value can be accessed.
· No PMI required.
A VA Cash-Out refinance loan allows eligible homeowners to access all of the equity built up in their home.
For example: The value of the home is $200,000 with a current mortgage of $150,000. The new loan amount may be for the full-appraised value of $200,000, with $150,000 going to pay off the existing mortgage and $50,000 to use toward debt or other expenses.
Interest rates for VA Cash-Out refinance loans are generally in line with VA purchase rates and often slightly lower than conventional interest rates which is another excellent reason for considering a VA refinance over the other home refinance alternatives.
It should be noted that not all lenders will approve 100% LTV loans, even when allowed under VA regulations. Check with your lender to see if they allow a 100% Cash-Out. Additionally, properties located in Texas will be subject to Texas state law which currently limits loans to 80% LTV.
VA Cash-Out Refinance Loan Process
The application process for a VA Cash-Out refinance loan is very similar to a VA purchase loan. The applicant must:
· Intend to occupy the home as their primary residence.
· Be an eligible veteran with available entitlement.
· Verify income sufficient to meet the increased mortgage payment.
· Be a satisfactory credit risk.
· Pay the VA funding fee (may be incorporated into the loan).
To determine the maximum loan amount, an appraisal will be required.
In closing, It is recommended to do a financial assessment to evalute your total debts. If you have credit card debt, personal loans, or just want a lower house payment a VA Cash-Out Refinance may be what you are looking for. If you would like to discuss your options and talk with a licensed VA home loan lender call 855-956-4040.
By Melissa Lagerquist
