The VA cash out refinance: explained
If you’re a veteran, getting a VA loan can be a financially smart decision. Not only can it save you money on a down payment, but your interest rates may be lower too. Like many veterans, refinancing can further help you and your family. Refinancing a loan can lower your monthly payments and lessen the term of your loan. You may also be interested in a VA cash-out refinance, which can allow you to get cash from your home. What does it mean to refinance this type of loan? What benefits can you expect? Let’s talk about it.
What does it mean to refinance?
Refinancing is a process in which you exchange your current mortgage for one with different loan terms, such as interest rates. The old mortgage is paid off by the new one. One common reason people refinance their loan is because there are better interest rates available than when they first got their loan. Some other reasons you might want to refinance your mortgage are:
- You want to change your loan term
- You want to change the type of loan you have
- You want to remove someone from the mortgage due to a divorce or other life event
- You want to cash out your equity
A cash-out refinance is when you cash out your home’s equity for money and change your loan terms in the process. You may be wondering why you would want to do this? Let’s talk about why and how you would cash-out refinance your loan.
What is a cash-out refinance VA loan?
VA loan cash-out refinance definition
A VA cash-out refinance loan is available to veterans who have a conventional or VA loan. It allows you to cash out your equity on your home. By replacing your current mortgage with a new mortgage at a higher amount, you can get the difference in cash upon closing. Unlike FHA loans, which allow you to use 80% equity, with a VA cash-out loan, you can use up to 95% of your equity.
A VA cash-out refinance loan increases the principal of your mortgage, leading to you potentially paying more in interest over time. It can also extend the life of your loan. To estimate how much your loan will cost, check out our VA loan calculator here.
There are many factors to cash-out refinances that you should be aware of, such as guidelines and requirements, and some fees that most people erroneously overlook.
Guidelines & Requirements
It is important to keep in mind that each lender has their own guidelines and rules. To truly understand what requirements need to be met, you should speak directly to your lender. Some things to be aware of include:
- You must have substantial home equity before getting approved.
- You must wait 210 days after first payment of the VA home loan to be eligible for any kind of VA cash-out refinance.
- You must verify that you plan to live in the property being refinanced.
- You, typically, must have a credit score of at least 620 (although this can vary based on lender).
- Homeowners who meet a lender’s loan-to-value guidelines can finance their funding fee.
- Homeowners who meet loan-to-value guidelines can finance closing costs.
A loan-to-value ratio is determined by dividing your mortgage total by your home’s value. This ratio can determine your borrowing limits with a cash-out refinance.
- Funding Fees - If you’re a disabled veteran or a surviving spouse, you may be exempt from this fee. This fee is 2.3% of the total loan for the first time you use your VA loan entitlement, and 3.6%. (For VA streamline refinances, the fee percentage is the same for everyone, regardless of prior use.)
- Closing Fees - These can include lender fees, tax and insurance payments, funding fees, etc. They are usually no less than 1% and no more than 5% of the total loan amount. You can usually estimate if a loan will have large closing costs by looking at the difference between the loan’s interest rate and APR.
- Appraisal Fees - In some cases, the seller may agree to pay this. If not, however, you are responsible for it and it can often be factored into closing costs. The appraisal fee can vary by state but approximately ranges from $425-$875. There can also be additional fees tacked on by appraisers for extra time required to look over properties.
Sometimes, these fees can be rolled into the cost of your loan. This can prevent you from having to pay a large lump sum at closing, but it can also increase your monthly payments and can lower the total amount of money you’re able to borrow in some cases.
VA cash-out refinance loan FAQs
How long does it take for a VA cash-out refinance loan to close?
The best way to know the closing time on your VA refinance is to speak to a VA loan officer. They’ll be able to provide you with an accurate time frame. According to military.com, VA cash-out refinances take 45-60 days, although there are many variables at play.
What is an interest rate reduction refinance loan?
This is a type of refinance loan, also known as a “VA streamline refinance,” that not only reduces your interest rate and monthly payments, but can also add stability to your payments. It is popular for veterans and active duty members who have adjustable interest rates that change over time to get this loan. Getting an IRRRL can exchange that variable rate to a fixed rate, ensuring you have the same interest rate for the extent of the loan.
IRRRLs can also offer faster closings and less paperwork than other refinancing options. It doesn’t require you to document your income, however. While funding fees are typically affected by previous use of your VA loan entitlement, this does not affect IRRRLs. Both veterans and active service members can expect to pay the same funding fee, which, as of 2021, was 0.5%.
What are VA loan equity reserves?
This is terminology used to basically notify you that you’re eligible for a cash-out refinance VA loan. By tapping into your reserves, you are cashing out your equity.
Will refinancing your VA loan benefit you?
What can you spend your va cash out refinance on?
There are many benefits to a VA cash-out refinance (although, there are many drawbacks as well). You’re able to spend the cash you get out of your property on many different things. You can spend it on:
- Renovations and repairs
- Consolidate debts and bills
- College tuition and expenses
- Emergency coverage
If you want to make sure you will benefit from a cash-out refinance, ask yourself a few questions.
- What are the rates today and how do they compare to when you got your VA loan?
- How long do you plan on living in your home or owning your property?
- What is your current mortgage term and what will it be if you refinance?
Once you can answer these questions, you can better understand the full picture and you’ll be able to make a more informed decision. If you’re interested in cash-out refinancing your VA loan, Guaranteed Rate can help. Learn more about VA loans and cash-out refinancing here.
Guaranteed Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency.
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