Refinancing your VA loan to tap into your home’s equity is possible with a VA cash out refinance. In fact, you can borrow up to as much as 100% of your home’s equity with a VA loan. Is it worth it though?
As with any refinance, there are pros and cons that you must consider. Keep reading to learn both sides of the VA cash out refinance to see if it’s right for you.
What is a VA Cash Out Refinance?
First, let’s make sure you understand how a VA cash out refinance works. Once you have a VA loan, you can apply to refinance it for more than you currently owe on your mortgage. For example, let’s say you owe $100,000 on your current VA loan, but your home is worth $150,000. You may be able to borrow as much as $150,000 when you refinance.
When you increase your loan’s balance, you also increase your monthly payments and decrease your home’s equity. If you borrow as much as the home is worth, you’ll have no equity in your home for the time being.
The Good Side of the VA Cash Out Refinance
Refinancing with the VA cash out refinance can be beneficial for some people. Some of the most popular benefits of this option include:
- You get a lump sum of money – Any money that you don’t owe to your current mortgage provider becomes your money. You can do with the money as you see fit. Your lender probably won’t ask what you are going to do with the money unless you’ll use it for debt consolidation, which we’ll cover below.
- You can consolidate debt – If you have a high debt ratio, using the proceeds from your loan can help you pay that debt down or off completely. Some lenders may require this if you have a high debt ratio as it protects their interest in your loan.
- It’s easy to qualify – Just as you probably experienced with your VA purchase loan, it’s not hard to qualify for the VA loan. As long as you have eligibility for the loan and you can afford the payments, you’re in pretty good shape. The VA loan doesn’t have a lot of requirements or hoops you must get through to get the loan.
- You’ll get lower interest rates – Interest rates on a first mortgage are often much lower than the interest rates you could get on a personal loan or credit cards. This is especially helpful if you are trying to get yourself out of debt. The less interest you pay, the more money you can put towards the loan’s balance.
- You only have one payment to make – If you consolidate debt or use the VA cash out refinance rather than a home equity loan, you’ll only have to worry about one mortgage payment. This makes it easier to stay on top of your bills and avoid late fees or risking default.
The Bad Side of the VA Cash Out Refinance
The VA cash out refinance has a bad side, just as most mortgage programs have. They aren’t reasons to completely avoid the loan, but it’s definitely worth understanding so you know what you are getting yourself into.
- You’ll pay closing costs again – Unlike a personal loan or credit card, a mortgage costs money. Even though you paid closing costs on your original mortgage, you’ll pay them all over again when you refinance. This includes the funding fee that you paid to the VA.
- You put your home at risk – If you consolidate debt into your mortgage that isn’t related to your home, you put your home at risk for unsecured debt. If you can’t make your payments, you risk losing your home. If you kept the debt unsecured, your home wouldn’t be at risk.
- You may pay an inflated interest rate – Even though you can get a lower interest rate than most personal loans or credit cards charge, you’ll pay a higher rate than you have now. When you take cash out of your home’s equity, you put the bank at a higher risk. You increase your payments, which mean there could be a higher risk of default. Lenders make up for that risk with a higher interest rate.
- You may ‘reset’ your mortgage term – If you take another 30-year term even though you’ve already paid a few years on your current term, you start back at square one again. This means you’ll have a mortgage for a few more years than you anticipated when you bought the home. Resetting your term too much could be downright expensive.
The VA cash out refinance is a great resource when you need money and don’t have any other liquid assets. Keep in mind that it will take some time to get the equity out of your home and it may cost you to do so. If you’ve covered all of your bases, though, it could be a great way to get the money that you need.Click to See the Latest Mortgage Rates»