If you need to tap into your home’s equity and you have a VA loan, we have some great news for you. It might be possible to borrow as much as 100% of the home’s value for your cash-out refinance. Whether this will apply to you or not depends on the chosen lender. According to the VA, you can borrow as much as 100% of the home’s value. But, the lender has the final say in the LTV since they are the ones that fund the loan.
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What is a Cash Out Refinance?
A VA cash out refinance occurs when you take out a loan that is larger than your
current VA loan. Let’s say you have a current VA loan of $100,000. Your home is worth $200,000 though. If you refinance your loan and take out $200,000, you are taking cash out of the home.
The VA doesn’t specify what you have to do with the funds. You can use the extra funds to pay off a loan that isn’t your mortgage or you can keep the funds in your own bank account and use them as you see fit. Some people borrow the funds from their home in order to make home repairs. They figure they are investing back in their home so they might as well use the home’s equity.
Other people use the funds to
consolidate debt. If they have credit cards with high-interest rates, they often consider consolidating the debt into their mortgage and taking advantage of the lower interest rates. Just remember, if you do consolidate debt, you will pay interest on the debt for the next 30 years (if you took a 30-year term), rather than just the time that you hold onto the credit card debt.
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How Much Can You Borrow in the Refinance?
The VA cash-out loan has the same maximum loan amounts as a refinance as they do for the purchase. You can borrow up to the national conforming amount of $453,100. However, it depends on how much of your entitlement you have used. If you had full entitlement when you bought the home and you never used any other entitlement, you can pay off the existing loan and reuse the entitlement. If you don’t have full entitlement, you can borrow up to four times the amount of the entitlement you have.
VA guarantees 25% of your loan amount, which is where the four times the guaranty comes from on a VA loan. For example, if you have $40,000 in entitlement, you can borrow up to $160,000. Your Certificate of Eligibility lets you know how much entitlement you have, helping you to figure out how much money you can borrow.
The VA Funding Fee
Don’t forget that you will pay a VA funding fee every time you take out a new VA loan and the cash-out refinance is no exception. Normally, veterans pay 2.15% of the loan amount on a cash-out refinance, just like with a purchase. Reservists or those in the National Guard pay a slightly higher fee of 2.4% of the loan amount. You will pay this fee every time you refinance your VA loan or take out a new VA loan, so keep that in mind as you make your financial decisions.
The VA cash out refinance can be a great way to consolidate debt or
make improvements to your home. Make sure you can afford the higher payment comfortably and that it makes sense to pay the funding fee. In other words, make sure you are staying in the home and getting your money’s worth out of the investment.
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