If you want to refinance your home loan and tap into the equity (or cash value) that you have in the home, a cash-out refinance may be what you need.
Benefits of a Cash-Out Refinance
Pulling cash out of your home is a great way to use your equity for other major purchases. You can use the cash from your refinance to pay off other debt with higher interest rates, make improvements or renovate your home, finance college costs for you or a child, or help with other expenses. There are no limitations placed on what you can use the cash for once you complete the refinance.
A cash-out refinance differs from a Home Equity Loan or a Home Equity Line of Credit because it replaces your VA loan with a new one. This means that the process to apply is similar to an initial loan application. You can expect to provide detailed documentation of your current financial situation, including bank statements, income statements, and explanations of other debt.
You can choose to do a VA Cash-Out Refinance even if your initial loan is not a VA loan. This can mean lower interest rates and more savings compared to your current loan. Talking to a lender who is experienced with VA loans and refinancing options can help you decide what is best for your situation.
Limitations of a Cash-Out Refinance
Lenders may have limitations on the amount of cash you can take out compared to your home’s value. This loan-to-value number often requires you to keep at least 20% equity in the home, meaning that you have to have at least 20% of the home’s value remaining in the property and can only have a loan for up to 80% of the home’s value. If your home has increased in value due to market changes or improvements you have made, a cash-out refinance may be the way to go.
To do a VA Cash-Out Refinance, you will also need to show that you intend to occupy the home as your primary residence, just like you did with your initial VA loan. This is not the case when using a conventional loan, which you can also refinance to pull cash-out.
Expect to pay your closing costs upfront when doing a VA Cash-Out Refinance. A VA Streamline Refinance, on the other hand, allows you to roll these costs into the loan. The VA funding fee, which you will need to pay, can be rolled into the loan but may impact the amount of cash you are able to pull out in order to not exceed loan-to-value limits set by the lender.
Each lender is different, so it’s important to find and work with one that is knowledgeable and experienced. Ask them about their background working with VA loans and refinancing, as well as specific terms that they may be able to offer based on your situation.