100% Cash-Out Refinance Benefits
The main draw of a Department of Veterans Affairs-backed, cash-out refinance is that you can get cash back and obtain a loan for 100% of the current appraised value of your home.
What Is the Benefit of a 100% Cash-Out Refinance?
A 100% cash-out refinance allows you to replace your mortgage with a new loan for the full value of your home, giving you access to your equity as cash. It can be beneficial for funding home improvements, consolidating high-interest debt or other significant expenses. Mortgage rates are often lower than personal loan or credit-card rates, potentially saving you money. Plus, if used for home upgrades, the cash-out could increase your property value.
Why Choose a Cash-Out Refinance Instead of a Personal Loan?
A cash-out refinance can be a better option because you're likely to get a lower interest rate while borrowing more. The loan is secured by your home, and therefore, lenders are willing to provide larger amounts at more favorable terms compared to the unsecured nature of personal loans.
Additionally, if you use the funds for home improvements, the mortgage interest may be tax deductible, unlike the interest on personal loans. While refinancing involves closing costs and extends your repayment period, the lower cost of borrowing and potential tax advantages often make it a smarter choice for significant expenses.
What Can a Cash-Out Refinance Be Used for?
A VA-backed cash-out refinance loan can help borrowers to take cash out of their home equity to:
- Pay off high-interest debt, such as a credit-card balance
- Pay off liens
- Pay for school
- Make home improvements
The cash-out loan can pay off VA, Federal Housing Administration or conventional mortgages, whether current or delinquent. The loan must be secured by a first lien on the property. Any remaining proceeds can be taken as cash for lender-approved purposes.
Refinancing with Little to No Equity
Unlike many other loan programs, VA cash-out refinancing doesn't require a specific amount of equity. You can refinance almost all of your home's appraised value in most cases.
Can I Take Cash Out if I Don't Have Equity in the Property?
Yes, as long as you do not exceed 100% of the current appraised value. The appraisal is the key number here. For example, if you owe close to what your home is worth, you can still refinance your loan to access cash, as long as the appraised value supports it and you meet the lender's qualifications.
Keep in mind that borrowing the full value of your home leaves no cushion of equity, which could increase financial risk if property values decline.
What if the Value of My Home Has Decreased?
It all depends on the appraisal. The short answer is that yes, you can still apply for a VA-backed, cash-out refinance even if your home's value has decreased. However, there are limitations.
The VA allows you to refinance up to 100% of your home's current appraised value, so if the value has dropped, it could reduce the amount of cash you can access. If your mortgage balance is close to or greater than the home's current value, you may not be able to take out any cash or refinance at all.
What Options Are Available if I Have Negative Equity?
If you are underwater, meaning you owe more than your home is worth, there are still options to explore. If you have a VA loan, for example, a VA Interest Rate Reduction Refinance Loan (IRRRL) could help lower your interest rate without requiring an appraisal.
You may also be eligible for an FHA streamline refinance. This can reduce your rate without an appraisal, but you won't be able to access additional cash.
If refinancing isn't an option, you might consider a loan modification to adjust your payments or principal.
"If you find that you will be unable to make your payment when it is due, by all means let your mortgage company [servicer] know and try to work out a satisfactory plan to make up the payments missed," the VA advises.
Eligible Loans for Cash-Out Refinance
A cash-out refinance can be used on multiple types of home loans.
What Types of Loans Can I Use A Cash-Out Refinance on?
You can use a cash-out refinance on existing VA, FHA and conventional loans, as well as non-conforming loans. For VA loans, you can refinance up to 100% of your home's value, with no private mortgage insurance required.
FHA cash-out refinances allow access to up to 80% of your home's value, and conventional loans typically let you refinance up to 80% but may require private mortgage insurance, or PMI, if you borrow more.
Occupancy Requirements
Only those who have a Certificate of Eligibility and who meet VA and lender standards -- such as credit and income -- are eligible.
Do I Have to Live on the Property to Refinance?
Yes, you must live or plan to live in the home that you're refinancing.
Can I Use a Cash-Out Refinance on an Investment Property?
No, you cannot use a VA cash-out refinance on an investment property. VA loans, including cash-out refinances, are specifically for primary residences. The property must be your primary home to qualify for the VA-backed loan benefits.
How Long Do I Need to Occupy the Property After Refinancing?
According to the VA guidelines, you must intend to live in the home for at least 12 months after the refinance is completed.
Appraisal Requirements for a Cash-Out Refinance
An appraisal is required for a VA cash-out refinance to determine your home's current value. It helps establish the loan-to-value ratio (LTV), ensuring you qualify for the refinance and that you don't borrow more than the home is worth. This protects both you and the lender.
Do I Have to Have an Appraisal on the Property for a Cash-Out Refinance?
Yes, an appraisal is required.
How Is the Home's Value Determined?
An appraisal reports the current market value of a property while a property inspection reviews the physical condition. An appraisal report will make note of the physical condition and may even point out issues that need to be corrected before a final value can be made, but the primary purpose of the appraisal is to independently report the value of the home.
What if the Home Appraisal Is Lower Than Expected?
If your home appraisal comes in lower than expected during a VA cash-out refinance, it can limit how much cash you can take out since the VA typically allows you to refinance up to 100% of your home's appraised value. If this happens, you could try negotiating with your lender by providing extra comps or evidence to support a higher value. You might also consider paying down your loan to make up the difference. If you think the appraisal was off, you can request a second one. If these options don't work, you may need to rethink your refinancing plans.
Existing Liens and VA Loan Refinancing
When refinancing a VA loan, any existing liens on your property, like a second mortgage or home equity line of credit (HELOC), need to be dealt with. You'll either have to pay them off or include them in the new loan, depending on the type of refinance and how much equity you have in the home.
Do I Have to Have an Existing Lien on the Property to Refinance?
Yes. There must be an existing lien on the property in order to refinance your loan.
Can a Cash-Out Refinance Be Used if My Home Is Paid off?
Yes, you can do a cash-out refinance if your home is paid off. Essentially, you'd refinance the full value of your home and take out some of that equity in cash. How much you can borrow depends on your home's appraised value and your lender's rules.
Just remember, you'll need to repay the loan like any other mortgage.
Refinancing an Assumed Loan
Can I Refinance a VA Loan that I Assumed?
Yes, as long as you have title to the property you can refinance an assumed loan. Check with your lender as there are some additional regulations concerning assumed loans.
What Are the Requirements to Refinance an Assumed VA Loan?
To refinance an assumed VA loan, you need to meet certain requirements. First, you must be eligible for a VA loan, which includes meeting service requirements and providing proof of eligibility. You'll also need to show that you can afford the loan with a credit check and income verification. The property must remain your primary residence. If you're refinancing a VA loan that was previously assumed, you'll also need to handle any existing liens on the property. The new loan must follow VA rules for funding fees and loan limits.
Refinancing Wrap Mortgages
A "wrap" mortgage, or contract for sale, is when a buyer makes payments to the seller, who continues paying on their original mortgage. The buyer's loan wraps around the seller's existing loan, so no new bank loan is needed. It's a helpful option when interest rates are high or buyers can't get traditional financing.
Can I Refinance a Loan that I Have a Contract for Sale Which Was Initially Called a 'Wrap'?
Yes. Check with your lender as there are some additional regulations concerning contract-for-sale loans.
Handling a Second Mortgage on VA Loans
For eligible veterans or service members, it's possible to have two VA loans simultaneously, such as when purchasing a new home while retaining the old one. However, managing two mortgages can be financially challenging.
Also, according to the VA, "The second mortgage must be subordinated to the VA- guaranteed loan, that is, the second mortgage must be in a junior lien position relative to the VA loan."
Can I Pay off a Second Mortgage on My Property with a Cash-Out Refinance?
You can pay off any existing liens, as long as the new loan amount does not exceed 100% of the appraised value of the property.
Can I Consolidate My First and Second Mortgage with a Cash-Out Refinance?
Yes, you can consolidate your first and second mortgages with a VA cash-out refinance. This option simplifies your payments by combining them into a single loan, potentially reducing your interest rate. Additionally, if you have equity in your home, you may be able to access it for other financial needs.
Paying Off Other Debts with a Cash-Out Refinance
A cash-out refinance lets you tap into your home's equity to pay off other debts. By refinancing for more than you owe, you can use the extra cash to handle high-interest debt such as credit cards, personal loans or medical bills.
Can I Pay Off Other Debts?
Yes. As long as you do not exceed the VA requirement of 100% of the appraised value, you can use your cash back to pay off other debts.
Should I Pay Off High-Interest Debt Using a Cash-Out Refinance?
Using a cash-out refinance to pay off high-interest debt can be a smart move, but it depends on your situation. It may lower your overall interest rate and simplify your payments by rolling everything into one loan. However, keep in mind that you're turning unsecured debt into a secured loan tied to your home.
Costs Involved in a Cash-Out Refinance
Be aware that there are usually closing costs and fees associated with a cash-out refinance. Each lender's charges are different. You need to discuss closing costs with your lender.
How Much Does a Cash-Out Refinance Cost?
The costs can total into the thousands of dollars. Up-front costs may reduce the financial benefits, although they can be rolled into the loan. A lender can help you calculate the risks vs. benefits depending on your personal circumstances.
Does a Cash-Out Refinance Have Prepayment Penalties?
You can pay extra on your loan anytime you feel like it, because VA loans do not have any sort of prepayment penalty. Even if you don't have a large amount of money to pay against your outstanding loan, it can be a good thing to pay off your home loan with just a little extra each month. One note: Speak with a financial planner when considering making a large payment toward your loan.
The Cash-Out Refinance Timeline
The cash-out refinance timeline can vary, depending on your lender and specific circumstances. The timeline includes several key steps: application, gathering documents (such as proof of income and home value), appraisal, underwriting and closing. Each stage requires verification and approval, which can take time.
How Long Does the Cash-Out Refinance Process Usually Take?
Generally, you can close the loan within 30-45 days from the date you apply. However, your lender can give you a more accurate time frame.
What Can I Do to Speed Up the Process?
Delays may occur if there are issues with documentation, the appraisal value or if you're refinancing with an existing mortgage. While it may seem lengthy, a thorough process ensures everything is in order before you access the funds.
Staying on top of requests and keeping communication clear can help streamline the process, ensuring everything is in order before you access the funds.
Verifying Veteran Status
To qualify for a VA loan, the lender needs to verify your veteran status. This is done through the Certificate of Eligibility (COE), which proves your eligibility for VA benefits.
How Does the Lender Verify My Eligibility?
The COE will confirm whether you meet the service requirements based on your military service record. Once your eligibility is verified, the lender can proceed with your application, ensuring that you qualify for the specific VA loan benefits, such as no down payment or lower interest rates.
How Do I Get My Certificate of Eligibility?
For most borrowers, it makes the most sense to go straight to your VA-approved lender to get your COE. Most approved lenders have access to the VA online system and can print most COEs immediately. Not all COEs can be obtained this way, but many can. If your document cannot be obtained instantly, it's still wise to enlist your lender's help in obtaining it another way.
To get your COE, give your lender a bit of information about your military service. Usually, a COE can be acquired online instantly through a lender's portal or through the VA website.
Read More: VA Loan Certificate of Eligibility Guide
How Much Home Can You Afford?
What kind of home can you afford through your VA home loan benefit? Use our calculator to estimate your payments for different scenarios and find providers that offer VA loans and/or conventional mortgages and work with active military and veterans.
