VA cash-out refinance: How it works and what to consider

If you have a VA loan and you’ve built up equity in your house, you might be interested in learning more about a VA cash-out refinance. This type of refinancing can put money in your pocket, but exactly how much depends on your equity, goals and more. Here’s how a VA cash-out refinance works, and what to consider before doing one.

What is a VA cash-out refinance?

A VA cash-out refinance replaces your current mortgage — whether that’s a VA loan or a conventional loan — with a new VA loan. Ideally, the new loan has better terms while allowing you to cash out the equity you’ve built in your home. You can then use that cash for things such as upgrading the property or paying down debt.

If your existing home loan isn’t guaranteed by the VA but you’re eligible for a VA loan, you can do this cash-out refinance to take advantage of VA refinance rates.

Let’s say you took out a $200,000 home loan and you’ve paid back $80,000 of that balance, but your home is still valued at $200,000. With a VA cash-out refinance, you can get a loan for $200,000 and use that $80,000 (less closing costs and fees) however you prefer.

If you’ve accumulated $10,000 in credit card debt with an APR of 15 percent, for example, a VA cash-out refinance could help you pay off that amount quickly at a much lower interest rate. You might then use the remaining funds to remodel your kitchen or invest in other renovations.

How a VA cash-out refinance works

If you’ve been honorably discharged from the military or are currently on active duty, your service to your country comes with a big benefit: the ability to buy a home with a no-down payment VA loan or to refinance an existing mortgage, whether you already have a VA loan or not.

To apply for this type of refinance, the first step is to get a certificate of eligibility (COE), which verifies that you meet the service requirements to take advantage of a VA loan.

From there, the process of getting approved for a VA cash-out refinance is similar to applying for a conventional refinance. VA loans aren’t provided by the Department of Veterans Affairs, but rather through various mortgage lenders that offer VA loans. You’ll need to meet a lender’s credit score and debt-to-income (DTI) ratio requirements and any other key standards to qualify. Be prepared to hand over an in-depth portrait of your personal finances.

In addition to evaluating you as a borrower, the lender needs to assess the property’s value, so you’ll also need to get an appraisal.

Note that VA cash-out refinances are reserved just for the home you’re living in, so if you’d like to refinance a loan for an investment property or second home, you’ll need to explore other options.

How to get a VA cash-out refinance

To get a VA cash-out refinance, you’ll need to:

1. Find a lender. First, you’ll need to identify lenders that offer VA cash-out refinance loans. Then, you should compare rates and reviews for at least three lenders to find the best offer.
2. Get your COE. You can request this certificate online, via mail or potentially through your lender.
3. Provide your chosen lender with your information. This usually means handing over your COE, pay stubs, tax returns, bank account statements and other financial documents.
4. Close the loan. Your lender should be able to walk you through this paperwork-heavy process to finalize the loan.
5. Pay the applicable fee. You’ll likely owe your lender for closing costs, and you’ll need to pay the VA cash-out refinance funding fee, too.

Requirements for a VA cash-out refinance loan

To qualify for a VA refinance, you must be an active duty service member or veteran who was honorably discharged and meets minimum service requirements, or a surviving spouse. Beyond that, VA cash-out refinance guidelines vary slightly from lender to lender, but you usually need to meet these criteria:

• Obtain your COE
• Meet your lender’s minimum credit score requirement, generally 620
• Meet your lender’s DTI ratio requirement, generally no more than 41 percent
• Demonstrate proof of income
• Pay the VA funding fee

VA cash-out refinance costs

A VA refinance cash-out loan can help you save money, but you’ll need to pay closing costs to do it. Compare at least three mortgage lenders and their respective origination fees and other charges so you have a sense of how much you’ll need to bring to the table.

In addition to closing costs, you’ll pay the VA cash-out refinance funding fee, which varies depending on your status as a borrower:

• If you’ve never purchased a home with the VA benefit, the funding fee for a VA cash-out refinance is 2.15 percent of the loan principal.
• If you have used the VA benefit before — for example, if you have a VA loan and you’re refinancing it — the funding fee is 3.3 percent.

You can either pay this funding fee upfront or roll it into your loan. If you opt to roll it into the loan, just remember you’ll pay interest on that amount, too.

Benefits of a VA cash-out refinance

If you’re refinancing a conventional loan into a VA-backed one, you’ll likely save money because VA loans typically have lower rates. That might more than make up for the VA cash-out refinance funding fee that you’ll need to pay.

If you already have a VA loan but you want to pull out money with a VA cash-out refinance, liquidating some of the equity you’ve built in your home can give you cash to use for:

• Home improvements and repairs
• Paying off other, higher-interest debt
• Education
• Emergency expenses (e.g., medical bills, car repairs)

Alternatives to a VA cash-out refinance

A cash-out refinance isn’t the only option available to military service members. There’s also the VA IRRRL, or Interest Rate Reduction Refinance Loan, often called a VA streamline refinance. This option applies to homeowners who currently have a VA-backed loan, not those with conventional or FHA-backed mortgages. The benefit here is the ability to lock in a lower interest rate; you won’t be able to take cash out of your equity. The funding fee is much lower — just 0.5 percent — and there isn’t as much red tape, as you won’t need to undergo a credit check or get a home appraisal.

If you’re less concerned about lowering your interest rate and more focused on getting liquid cash, consider a home equity loan or home equity line of credit (HELOC). The interest rates on these types of financing can be higher, but you’ll avoid the VA funding fee, and these choices could be better suited for your situation overall.

Bottom line

A VA cash-out refinance can help you access cash or refinance a conventional loan into a VA-guaranteed loan with a lower rate. You’ll need to meet eligibility guidelines and be prepared to pay the funding fee and other closing costs. If you don’t want to use your VA benefit to refinance but still need cash, consider a HELOC or home equity loan instead. If you don’t need cash but want to refinance your existing VA loan into a new one, consider a VA streamline refi.

Frequently asked questions about VA cash-out refinance loans

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  How do VA cash-out refinance rates and standard cash-out refinance rates compare?

  Because VA cash-out refinance loans are guaranteed by the VA, lenders see them as lower risk. As a result, a VA refinance cash-out loan will usually come with a lower interest rate than a standard cash-out refinance.
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  What’s the difference between a VA cash-out refinance and streamline refinance?

  A VA cash-out refinance lets you liquidate the equity you’ve built in your home, turning it into cash in your hand. If you’re eligible for a VA loan but you currently have a conventional mortgage, you can also use this refinance option.
  
  A VA streamline refinance — or VA IRRRL — is only available if you already have a VA loan, and it doesn’t let you cash out any of your home equity. That said, the funding fee is lower and the loan application and closing process can be faster and easier.