The VA Cash-Out Refinance Program
If you're looking into refinancing your mortgage and have served or are serving in the United States Armed Forces, a VA cash-out refinance can help you get better loan terms. Beyond reducing your interest rate, the VA cash-out refinance is also a good option if you have equity and want to get cash out of your home.
What is the VA Cash-Out Refinance loan?
The VA cash-out refinance loan works as a new loan that would pay off your old home loan and, if applicable, pay out cash for any home equity that may have been accumulated. Home equity is the difference between the value of your home and the amount you still owe. If your home value has increased and you have been paying down your mortgage regularly, then you may have home equity.
VA cash-out refinance is different from typical home equity loans in that you can restructure your mortgage by replacing the old loan and with a new one in addition to paying out cash for accrued equity. Ideally, you can modify your current VA mortgage with better terms and a lower rate, and get a sum of cash while you're at it.
Why You Should Consider the VA Cash Out Refinance Program
A VA cash out refinance can be used to get better terms on a new loan for up to 100% of the home's value. If market rates have decreased since you took your original loan, you can use a VA cash out refinance loan to take advantage of the market fluctuation and lock in a lower interest rate.
Another great perk is that unlike the VA Streamline refinance program, if your original mortgage was not a VA loan, you can still use the VA cash-out refinance to convert your previous loan into a VA loan, with all of the benefits included.
If you do opt for the cash-out option, you may use the proceeds of the cash out as you see fit. For example, you can pay off high interest debt, make a large purchase, use it for medical expenses, make renovations to your home, or pay tuition fees. It's free to use however you want!
Qualified homeowners don't even need to worry about high closing costs like with many other loan programs. With the VA cash-out refinance program, closing costs and even the standard VA funding fee can be rolled into the cost of the loan, and paid along with the monthly payments.
VA Cash Out Refinance Pros:
You can finance up to 100% loan to value.
You can reduce your monthly payments by reducing your interest rate.
You could shorten your loan term and pay off your home faster. Although you will have higher payments, you will save on interest payments in the long run.
You can roll closing costs into the loan and so you will significantly reduce your out-of-pocket costs (zero in most cases).
You can refinance any type of loan.
VA Cash Out Refinance CONs:
If you borrow more than 80% of the home's value you may have to pay private mortgage insurance (PMI) which would increase your monthly payments.
If you draw cash from your home equity, you are effectively extending the number of years you are in debt.
VA cash refinance only pays out home equity as one large pay out, which immediately demands interest payments. So, if you need the money to use on an expense that requires you to pay in stages like tuition or renovations then you will pay interest on unused funds.
Closing costs are usually higher than home equity loans.
How to Qualify for the VA Cash-Out Refinance Program
The VA cash out refinance isn't available to everyone. It's a loan program backed by the U.S. Department of Veterans Affairs for the sole purpose of making home ownership easier for current and former members of the armed forces. Since you are able to refinance any loan through the program and convert it into a VA Loan, all of the necessary eligibility criteria for a VA Loan must be met, such as having a Certificate of Eligibility (CoE). To get a CoE you must have;
Served actively for at least 90 days during wartime
Served actively for at least 180 days during peacetime
Completed 6 years of service in the National Guard or Reserves
Be a spouse whose partner died in active service or due to injuries incurred during service.
In addition to the above, the home you intend to refinance should be owner-occupied. On top of this, you may not have made a late payment (more than 30 days late) within the last 12 months.
If you have served and do not fit the above criteria, don't worry. There are more specialized criteria from which you may still qualify. Just speak with a home.loans specialist for assistance in determining your eligibility.