A cash-out refinance allows you to refinance to a new mortgage loan and convert some home equity to cash that you can use for anything, from paying for home renovations to covering a child’s college tuition to consolidating high-interest-rate credit card debt.
A VA cash-out refinance is similar, only you’ll be signing a VA loan: a mortgage with unique terms for qualified borrowers. Is applying for a VA cash-out refinance, or a VA cash-out refi, a smart move? Let’s explore.
VA Loan Overview
A VA home loan is a type of loan insured by the U.S. Department of Veterans Affairs. These loans are attractive because they require no down payment. If you can afford monthly mortgage payments but don’t have down payment funds, a VA loan may be a good option.
However, these loans aren’t available to all borrowers. You must be an active-duty member or veteran of the U.S. Armed Forces, National Guard, Coast Guard or Reserves. You can also qualify if you’re a surviving spouse of a veteran who died on active duty or who suffered a service-related disability. If you are a surviving spouse, you may not qualify for a VA loan if you have remarried.
What Is A VA Cash-Out Refinance?
A VA cash-out refinance allows eligible borrowers to tap into their home equity and use that cash to pay for home improvements, pay off outstanding debt or fund another expense of their choosing.
With this type of VA refinance, you’ll refinance an existing mortgage loan (either a current VA loan or another type of loan) into a new VA loan. But you’ll refinance for more than what you owe on your current mortgage, taking the extra amount as cash you can spend however you’d like.
Say you owe $200,000 on your existing mortgage and your home is worth $400,000. You can refinance to a new VA loan of $280,000, receiving the extra $80,000 in cash.
What’s Your Goal?
Buy A Home
Discover mortgage options that fit your unique financial needs.
Refinance
Refinance your mortgage to have more money for what matters.
Tap Into Equity
Use your home’s equity and unlock cash to achieve your goals.
How Does A VA Home Loan Cash-Out Refinance Work?
The process of getting a VA cash-out refinance is similar to the standard refinance process.
First, you’ll need enough equity in your home. Equity is the difference between what you owe on your mortgage and what your home is worth. If you owe $150,000 on your mortgage and your home is worth $350,000, you have $200,000 in equity.
The amount of equity you have matters when determining how much cash you can take out with a VA cash-out refinance. You can’t borrow more than your equity amount. Most lenders won’t allow you to borrow up to your full equity level, either. Eligible veterans may borrow up to 100% of their home’s value. However, most lenders limit that to 90%, which means you’ll typically need to leave at least 10% equity in your home after the refinance.
As with all refinances, you’ll have to pay closing costs for a VA cash-out refinance. The amount you’ll pay will depend on your lender, but expect to spend 2% – 6% of your loan’s value on closing costs. You can sometimes roll your closing costs into your loan so that you don’t have to pay them up front, though not all fees are eligible.
Ready to Refinance?
Get matched with a lender that can help you reach your financial goals.
VA Cash-Out Refinance Guidelines
To apply for any VA loan, including a VA cash-out refinance, you’ll need to show your lender your VA Certificate of Eligibility (COE). This document, issued by the VA, shows that you meet the service requirements to qualify for a VA loan.
You must also meet any credit and income requirements set by your lender. The VA does not originate loans; it only insures them. To do a VA cash-out refi, you’ll need to work with a private mortgage lender. That lender might require a certain FICO® credit score and debt-to-income ratio, both of which will vary by lender.
Your lender might also request proof of income, such as pay stubs, bank account statements, tax returns and W-2 forms.
You should also expect to pay a VA funding fee, which is a one-time charge for closing a VA loan. If it is the first time that you are taking out a VA loan, this fee will be up to 2.15% of your loan amount. If you have taken out a VA loan before, you’ll pay a VA funding fee of up to 3.3% of your loan amount every additional time you refinance.
View Your Refinancing Options
Find a refinance lender that will work with your unique situation.
How To Get A VA Cash-Out Refinance
Ready to apply for a VA cash-out refinance? Here are the steps to take:
1. Compare VA lenders. Shop around with several lenders to find the one that will give you the lowest interest rate and charge the lowest closing costs for your VA cash-out refi. You can work with any lender licensed to do business in your state.
2. Obtain a COE. You’ll need a COE from the VA stating that you meet the military service requirements of a VA loan. You can request your COE and provide the information necessary for it online or ask your lender to request a COE for you. You can also download and print out VA Form 26-1880, fill it out and mail it to your regional VA loan center.
3. Fill out a refinance application. You’ll need to provide your address, full name and Social Security number. You’ll also have to provide information about your income and debts as well as give your lender permission to check your credit.
4. Complete a home appraisal. Your lender will send an appraiser to determine the market value of your home. This matters because you need enough equity in your home to cover the amount of cash you want to take out.
5. Close on your refinance. If your lender approves your VA cash-out refinance, you’ll sign the required documents. Your new loan proceeds will be used to pay off your old mortgage, and you’ll receive the cash portion in a lump sum, often deposited directly into your bank account. You’ll then begin making your monthly payments on your new loan.
Pros And Cons
Here are some of the pros of a VA cash-out refi:
- You may be able to qualify for an affordable interest rate on your refi, or a more affordable rate than other borrowing solutions.
- You can use your cash for any purpose.
- There’s no private mortgage insurance, though there is a VA funding fee.
- You may be able to deduct the interest on your cash-out refinance if the money is used to substantially improve your home.
Here are some of the cons of a VA cash-out refi:
- You’re increasing your total debt by borrowing more.
- There’s a funding fee that comes with all VA loans.
- You’ll need to go through a home appraisal to qualify.
- You could face expensive closing costs, depending on what your lender charges.
VA Cash-Out Refinance Alternatives
Although there are benefits to a VA cash-out refinance, you should know that there are other options for borrowing money.
- A home equity loan lets you borrow a lump sum against your home equity. You pay the loan back in installments in fixed monthly payments.
- A home equity line of credit (HELOC) gives you access to a line of credit you can tap as you choose. That draw period typically lasts for about 10 years, while the repayment period could last 20 years, depending on the terms of your agreement.
- A personal loan is a loan you can borrow for any purpose. It’s unsecured, which means it isn’t tied to your home equity or any other specific asset you own.
FAQ
Have questions about VA cash-out refinances? Here are answers to some of the most common ones.
The Bottom Line On A VA Cash-Out Refinance
If you qualify for a VA loan and need a quick influx of cash, a VA cash-out refinance could be a good option. It can be especially beneficial if you use the money to complete projects that increase the value of your home. Just make sure you understand the pros, cons and costs before moving forward.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
