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

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What is a VA cash-out refinance?

A VA cash-out refinance replaces your current mortgage with a new VA loan, ideally with better terms, while allowing you to take out cash against your home for a variety of reasons, such as upgrading the property or paying down debt. If your existing home loan isn’t backed 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. 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 refinance an existing loan.

To apply for a VA cash-out 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.

The process of getting approved for a VA cash-out refinance is similar to applying for any conventional refinancing option. VA loans aren’t provided by the Department of Veterans Affairs, but rather offered through a variety of mortgage lenders, so you’ll need to meet a lender’s credit score and debt-to-income ratio requirements and any other key standards to qualify. Be prepared to hand over an in-depth portrait of your personal finances, as well, including:

  • W-2 statements and tax returns from the past two years
  • Paycheck stubs from the past month
  • Any other documentation your lender requests

In addition to evaluating you as a borrower, the lender needs to assess the property, so you’ll also need to get an appraisal. An appraisal informs how much money you can take out in cash when you refinance. For example, if your current loan was initially $200,000, but your home’s value has since increased to $230,000, you could qualify for more cash.

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.

VA cash-out refinance costs

A VA cash-out refinance can help you save money, but you’ll need to pay closing costs to do it. Compare at least three VA 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 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 2.3 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 3.6 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.

Should you do a VA cash-out refinance?

To determine whether a VA cash-out refinance loan is a good option for you, start by evaluating your existing loan. Ask yourself:

  • What is the interest rate on that loan? Take a look at what you’re paying for your existing loan. Then, compare that to current VA refinance rates to see how much you might be able to save.
  • Are you paying mortgage insurance on the loan? If your current mortgage is a conventional or FHA loan, you might be paying for mortgage insurance. If you refinance to a VA loan, you won’t have to pay for that insurance.
  • What do you plan to do with the cash? Getting access to cash at a low interest rate is one of the main perks of a VA cash-out refinance, so consider your goals for those funds. These might include consolidating debt, financing home improvements or paying for tuition.
  • How long do you plan to stay in your home? Refinancing isn’t free, so you need to make sure you’ll have enough time for those lower monthly payments to add up to a payoff. Use Bankrate’s refinance calculator to understand how many months you’ll need to recoup closing costs.

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 an appraisal on the home.

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.

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