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What Is Cash-Out Refinancing?
The Department of Veterans Affairs allows homeowners to take cash out of your home equity in order to pay off debt, pay tuition, or make home improvements. A VA cash out refinance can also be used to refinance a non-VA home loan into a VA loan.
How Cash-Out Refinancing Works
It’s important to know, first off, that a a VA cash out refinance is not a home equity loan, nor is it a second loan to go with your mortgage. Instead, it replaces your existing mortgage.
Cash-out refinancing works one of two ways. First, it can be used to open a loan of greater value than your current loan, with the VA allowing a loan of up to 100 percent of the home’s appraised value. For example, if you bought the house with $300,000 mortgage, but a new appraisal values the home at $400,000, you can take out a loan for $400,000 minus closing costs imposed by the lender, or about $100,000 in cash.
The loan can also be used to pay off your current mortgage in order to switch to a VA-backed loan. This is a loan through a private lender, but the mortgage is backed by the federal government, and thus has quite a few benefits over a conventional or FHA mortgage.
Why Get a Cash-Out Refinancing VA Mortgage?
While the loan of up to 100 percent of your home’s appraised value is a great reason to get a cash-out refinance, most of the value is in refinancing to a VA-backed mortgage from a conventional home loan.
There are major benefits to a VA-backed loan. For a service member that already has a mortgage, some of the benefits, such as no down payment, are wasted. However, with a lower interest rate — VA-backed loans have the lowest interest rate among home loans, thanks to being backed by the federal government — the late of prepayment fees, and a staff dedicated to help you avoid foreclosure, it’s worth switching if you qualify. The loan is also assumable, meaning instead of selling the house and the buyer getting a new loan, they can “assume” the VA-backed loan instead.
This is not an IRRRL, also called a streamline refinance. This only occurs if you already have a VA-backed loan you wish to refinance. A cash-out refinance occurs when you are refinancing a non-VA-backed loan to a VA-backed loan.
Does the VA Offer Home Equity Loans or Lines of Credit?
As mentioned above, the VA does not offer home equity loans or lines of credit against your house. Your option is instead to use a cash-out refinance, which replaces your loan instead of sitting alongside it.
A home equity loan, meanwhile, is a second mortgage — a second loan on top of your existing mortgage. It’s only possible, as the name implies, when your home as equity, or is worth more than your mortgage amount. It’s not just for home-related expenses; it can be used to pay off other expenses, as well.
Unlike a cash-out refinance, you don’t have to take a home equity loan as a lump sum. You can also get approved for the maximum amount, but only borrow what you need, and borrow multiple times after approval. This is known as a home equity line of credit, or HELOC.
VA Cash-Out Refinance Guidelines
Eligibility and Restrictions
Eligibility for a cash-out refinance is very similar to an IRRRL. You must be an active service member or veteran with an honorable discharge, a current Reserve or National Guard member with 6 years of service, unmarried surviving spouses, or commissioned officers with the Public Health and National Oceanic and Atmospheric Administration. You will need a Certificate of Eligibility, as you would if you were simply applying for a VA mortgage.
A property appraisal is required to determine the maximum loan amount. This, again, is up to 100 percent of the appraised value.
It’s also important to note that these are the VA restrictions. However, the VA itself does not give out the loans; private lenders do. They may have their own limits, which override the VA’s limit. For example, your lender may not allow more than a 90 percent loan.
VA Cash-Out vs Streamline Refinancing
There are two more requirements, different from the IRRRL requirements. You also need to provide your last pay stub and W2 forms from the past two years in order to prove you have income. Private lenders may also ask for the previous two years’ tax returns, as well.
Along with income requirements, a cash-out refinance also requires a credit check. Most lenders require a score of at least 620, in the “fair” category.
The funding fee is also higher for a cash-out refinance. However, like an IRRRL, the cost can be rolled into the loan itself, so you do not have to pay out of pocket, up front.
Finally, you must occupy the residence in question.
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