VA Cash-out Refinance: Pros and Cons

If you have a VA loan, you have a few options when you want to refinance. One is the VA cash-out refinance. In fact, you can even use this loan program if you don’t have a VA loan now, but you are eligible for one.

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Before you make use of this loan program, though, you should know the pros and cons so that you can decide if it’s right for you.

What is a VA Cash-Out Refinance?

Let’s dive into what the VA cash-out refinance is first.

If you need to borrow more than your outstanding principal balance on your current loan, you need a cash-out refinance. This loan program allows you to tap into your home’s equity. For example, if you owe $150,000 on your loan, but your home is worth $250,000, you can borrow more than the $150,000 that you owe. You are then free to do what you want with the proceeds after the closing agent pays off your original loan.

Common reasons veterans use this program include:

  • Make home improvements
  • Pay off debts
  • Pay for college
  • Cancel mortgage insurance on an FHA loan or PMI on a conventional loan

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The Pros of the VA Cash-Out Refinance

The VA cash-out refinance sounds like the perfect program and it does have its benefits. They are as follows:

  • You can borrow up to 100% of the value of the home. On our example above, you could potentially take out a mortgage for as much as $250,000. If you compare this to conventional loans, where you can only take out up to 80% of your home’s value, it’s a great program.
  • You can refinance any type of loan. Unlike the VA IRRRL program, you can pay off any type of mortgage with the proceeds from a VA cash-out refinance. As long as you have eligibility for the VA loan program (you are a veteran that served enough time and was honorably discharged), you can refinance any mortgage loan.
  • You won’t pay mortgage insurance. The VA doesn’t charge mortgage insurance on any of their loans, including the VA cash-out refinance.
  • You can have a debt-to-income ratio up to 41%. This includes all of your debts, such as the new mortgage payment, credit card payments, installment loans, or personal loans.
  • You can consolidate debt at a lower interest rate than you pay (in most cases). This can save you money on interest in the end.

The Cons of the VA Cash-Out Refinance

  • You put your home at more risk. If you consolidate unsecured debt into your home, it’s now secured by your home. If you pay for anything but renovating your home, you put your home at risk of foreclosure for something that isn’t tied to your home.
  • You increase the amount of your mortgage, which means a higher mortgage payment.
  • You may have a higher interest rate than your purchase loan since the lender takes a higher risk lending you more money.
  • You have to pay the 2.15% funding fee again. You already paid this fee when you bought your home. If you refinanced with the VA IRRRL (streamline refinance), you would only owe 0.5% of your loan amount.
  • You have to verify your credit score, income, and home value. This means you’ll have to pay for another appraisal.

Weigh the pros and cons of the VA cash-out refinance. Ask yourself why you are taking the money. Do you need it or are you just taking it out because it’s available? Do you have other ways you can get the money?

Remember, you will pay this debt for the next 15 – 30 years. Calculate the extra interest this will cost you and figure out if it’s worth it. Generally, if you use the money to fix up your home, you’ll see a return on your investment because your home’s value will appreciate. If you use it for other purposes, you won’t see an increase in your home’s value. In some cases, though, it could be the best way for you to get the one you need at an affordable interest rate.

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