A Department of Veterans Affairs (VA) cash-out refinance is a way for veterans, active-duty military personnel and surviving spouses to borrow money against the value of their home’s equity.
With a cash-out refinance, you replace your current mortgage with a new VA loan for a higher amount and get the difference in cash at closing. For example, if you have a $150,000 mortgage and substantial home equity, you might refinance to a $200,000 VA loan and get $50,000 in cash.
How Does a VA Cash-Out Refinance Work?
There are two important things to understand when you want to get a VA cash-out refinance. The first is that you need a reasonable amount of equity in your home to qualify. The second is that VA loans often allow you to borrow more money than other kinds of loans, because you may be able to finance up to 100% of your home’s value.
The amount of home equity you need and the amount of money you may get depend on the maximum loan-to-value ratio (LTV) of the refinance. The loan-to-value ratio is a percentage you get when you divide the current value of your home by the current principal balance of your mortgage. For example, if your home is worth $250,000 and your mortgage balance is $150,000, then you have a 60% loan-to-value ratio. (That is, $150,000 ÷ $250,000 = 0.6 or 60%).
With a VA cash-out refinance, you may be able to get approved for a new VA loan with an LTV of 100%. Look at this sample calculation using some of the numbers we just discussed:
|Current mortgage balance||$150,000|
|Sample maximum LTV||1.0 or "100%"|
|Maximum new mortgage balance||$250,000 ($250,000 x 1.0)|
|Maximum cash available||$100,000 ($250,000 - $150,00)|
In this example, the VA homeowner has enough home equity that they may qualify to borrow up to $100,000 with a cash-out refinance.
To get approved for VA cash-out refinancing, you will need to fill out an application and submit credit, income and financial documents. You might need a new home appraisal. Most VA homeowners will need to pay a VA funding fee as well as closing costs. You also will need to sign loan disclosures and attend the closing, where you will get your new VA loan, plus your cash.
Benefits and Costs of VA Cash-Out Refinancing
VA homeowners get cash-out refinances to pay for home improvements and educational expenses. They also can be used to consolidate higher-interest debts. For example, if a VA homeowner has credit card debt, they might decide to use the cash from refinancing to pay down this debt, because the interest rate on their VA loan is substantially lower than the interest rate on their credit card debt.
You may be able to lower your interest rate, too, depending on current rates, with cash-out refinancing. Keep in mind these costs, however. Cash-out refinances increase the amount of money you owe. Your monthly payments may increase. It may take longer to pay off your mortgage, and you may pay more interest over the life of the loan, too.