If you’re a veteran, an eligible service member or a surviving spouse who qualifies for a VA loan, you may be able to refinance your primary mortgage without jumping through hoops to pay off any subordinate financing you have on your house. But, if you’re considering refinancing your VA loan and to get a low-interest rate, you might be worried you’ll have to pay off any secondary financing, like a HELOC or home equity loan, to do it.
Let’s take a look at how you can refinance a VA mortgage without affecting your VA loan entitlement or second mortgage.
How To Refinance A VA Loan And Keep A Second Mortgage
Military service comes with several advantages when it comes to purchasing or refinancing a home. Less stringent rules around credit scores and the ability to qualify for lower interest rates are just some of the benefits of VA loans. Refinancing a VA loan may be a good option if you’re looking to lower your monthly payments, take advantage of lower interest rates or use some of your home equity to cover various expenses.
Let’s look at the options for keeping your second mortgage while refinancing to a VA loan.
- VA Streamline refinance: The easiest ways to refinance a current VA loan and keep your secondary mortgages is the VA Streamline refinance. Also known as the Interest Rate Reduction Refinance Loan (IRRRL), this option allows homeowners with an existing VA home loan and to easily change their mortgage terms.
- Refinance conventional to VA: Refinancing a conventional mortgage to a VA loan can be an advantage if the mortgage rate on your original loan was high. This is because the VA offers lower interest rates on their loans.
- VA cash-out refinance: A VA cash-out refinance is also available to veteran homeowners who want to withdraw cash from their home’s equity. This money can be used for emergency expenses, home improvements, repairs, debt consolidation and more.
Keep in mind that you’ll need to go through a VA lender to apply for any of these loans. VA mortgage lenders will be familiar with the type of VA loan best suited to your particular situation, and they’ll be able to tell you the number of times you can use a VA loan. So talk to your mortgage lender to see which option you qualify for.
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Requirements For Keeping A Second Mortgage With A VA Loan
Borrowers can opt to refinance their VA home loan and keep their existing secondary mortgage. The Department of Veterans Affairs has requirements for doing so, including the following:
- The mortgage lender must submit documentation explaining the source, loan amount and repayment terms of the secondary mortgage while also disclosing the borrower’s and co-borrower’s agreement to these terms.
- The new VA-backed loan becomes the primary mortgage and the second mortgage is subordinated to the VA-backed loan.
- Money from the second mortgage may be used to cover closing costs and other expenses, but it can’t be used to cover a down payment required by the VA.
- The interest rate on the second mortgage can’t exceed industry standards for second mortgages, but it can exceed the rate of the VA-backed home loan.
For additional terms and conditions related to secondary borrowing, please visit the VA’s website. It’s also important to note that the second mortgage lienholder, or subordinating lender, must approve the agreement as well.
You can help speed up this process by having your paperwork from your original mortgage and any secondary financing on hand. Make sure to have your military-specific documents, like your Certificate of Eligibility (COE), accessible as well.
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Benefits Of Getting A Second Mortgage With A VA Loan
There are several benefits to being able to keep your second mortgage in place while refinancing. Let’s take a look at some of those potential benefits.
Employment Benefits
Whether you’re a service member or not, any homeowner can benefit from keeping certain types of secondary financing. For example, many cities offer home buying assistance to encourage buyers to live in specific places and some employers may even offer home buying assistance as an employee perk. Many of these programs are structured to let home buyers take advantage of forgivable loans.
Let’s say you accept a new job that offers a $15,000 forgivable loan toward down payment assistance if you stay with the company for 4 years. It’s beneficial to subordinate this loan so you don’t have to pay the company back. Just remember that any down payment you make with subordinate financing can’t be based on it being required by the VA.
Lower Interest Rates
Now imagine you’re trying to refinance your house to take advantage of lower interest rates. In some other cases, you might be required to pay off the forgivable loan that’s a lien on your house before you can refinance your primary loan. On VA loans, you can keep that secondary financing in place.
This means you can still take advantage of lower interest rates from a VA mortgage without losing the benefits from your forgivable loan.
Home Equity Perks
If you have secondary financing for the purpose of utilizing your equity, it’s worth noting that with a VA mortgage, you can get a primary mortgage up to the total value of your home. This could help you get a lower rate than you otherwise might with a second mortgage, such as a home equity loan or HELOC.
Not having to pay off secondary liens during a mortgage refinance represents the removal of a significant financial barrier to refinancing for clients, but it’s just one of several great things about the VA loan program.
The Bottom Line
The VA makes it possible for eligible veterans and service members to refinance their VA loans without also having to pay off their second mortgage.
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Kevin Graham
Kevin Graham is a Senior Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a bachelor's degree in journalism from Oakland University.
