Is a cash-out refinance worth it? For many homeowners, a cash-out refinance can be a powerful financial tool. You can use it to refinance an existing VA loan or convert a conventional loan into a VA loan. But you should carefully consider whether it matches up with your overall financial goals.
Homeowners often use a cash-out refinance if they're deep in credit-card debt and/or medical debt, or if they need to fund home improvement projects. These can be valid reasons to take advantage of a cash-out refinance.
But first, make sure you understand the benefits and risks of this type of loan so you can make an informed decision.
Understanding Your Financial Goals
If you have enough equity in your home, a cash-out loan underwritten to conventional standards can provide more cash to you without the need for a funding fee.
Before going forward with a cash-out refinance, have a solid financial plan in place. Which of the following goals applies to your situation?
- Consolidating debt: You can use your home equity to pay off high-interest debts and simplify your monthly bill-paying.
- Home improvement projects: Financing renovations or repairs that enhance your property's value
- Cash for long-term investments: You may want cash to invest in long-term goals. Using the money from your refinance on useful investments -- like home improvements, improving your business or getting a degree -- could pay dividends in the future. Anything that can result in gaining some personal or financial equity down the road is a good thing.
Knowing your "why" will help determine whether a cash-out refinance is worth it for your unique situation.
Know Your Eligibility
Only those who have a Certificate of Eligibility and who meet VA and lender standards -- such as credit and income -- are eligible. You must also live or plan to live in the home that you're refinancing.
More details about the requirements include:
- Income verification: Provide recent pay stubs, W-2s, and possibly federal tax returns to show income can cover mortgage and other debts.
- Credit score: Most lenders require a minimum score of 620; some may need 680 or higher.
- Property appraisal: You may ask yourself, "Can I do a 100% cash-out refinance?" Yes, you can. A full appraisal determines loan limits, up to 100% of the home's value, though borrowers can choose less.
- Paperwork: Besides securing a VA Loan Certificate of Eligibility, you'll also sign disclosures and attend a closing to get the money.
Finally, you may have heard about the cooling-off period of the 210 day rule. What is the 210 day rule for VA loans? Simply put, you must wait at least 210 days from your last loan's first payment date. This is a government rule to ensure that the existing VA loan is paid off.
Shop Around for the Best Lender
Not all lenders are created equal. Take the time to compare rates, terms, and fees among VA-approved lenders. Look for lenders who are transparent about costs and who offer competitive terms that fit your financial needs.
Don't forget to ask key questions like "What is the interest rate on a VA cash-out refinance?" and "Are there any extra fees that haven't been discussed yet?"
See more information below about finding the right lender for you.
Cost Considerations
Make sure the VA cash-out program is a true benefit to you. Here are some key points to consider:
- How much are closing costs on a VA cash-out refinance? Typical closing costs include appraisal fees, origination fees, and title insurance.
- Funding fees: Although some veterans are exempt, VA home loans usually require a funding fee that can be about 1.25% to 3.3% of the loan amount.This fee reduces the net amount of cash to the borrower.
- Break-even point: Figure out how long it will take to recoup closing costs, and determine whether refinancing makes logical sense for your situation.
- Paying more interest: Cash-out refinancing increases your mortgage balance. Extending the repayment period might result in paying more interest over the life of the loan.
Just be sure that the priority of what you're using the money for outweighs the closing costs and the possible financial hit you may take if the value of your home goes down.
Assess the Risks
Although a cash out refinance can offer several benefits, it's important to understand the potential pitfalls.
Most importantly, since your home is used as collateral, failing to make payments could result in foreclosure.
Also, as mentioned above, refinancing may also extend the length of your mortgage, potentially increasing the total amount of interest paid over time.
Finally, be aware that there are usually closing costs and fees associated with a cash out refinance, and these can total into the thousands of dollars. Upfront costs may reduce the financial benefits, although they can be rolled into the loan. A lender can help you calculate the risks vs. benefits depending on your personal circumstances.
Use Your VA-Specific Benefits
VA loans come with unique benefits that can make refinancing more attractive:
- No Private Mortgage Insurance (PMI): Save on monthly costs compared to traditional loans.
- Use your equity: You can turn your home's equity into cash.
- Competitive Rates: Take advantage of lower-than-average interest rates for VA loans.
- Consolidate debts: You may be able to gain the ability to pay off a non-VA loan if needed.
Organize the Necessary Documents Ahead of Time
Are you wondering, "How do I prepare for a cash-out refinance?" Before even talking to a lender, make sure you have all your paperwork ready. It will save time and headaches. Gather these documents before applying:
- Proof of income and employment
- Credit reports and scores
- Your Certificate of Eligibility (COE)
- Property-related documents, such as your home's title and current mortgage statements
Strategically Time Your Refinance
Timing is everything when it comes to maximizing the benefits of a cash-out refinance. Most importantly, if possible, refinance when interest rates are low to secure the best terms. If you can lock in a more favorable rate, you'll potentially reduce your monthly payment and the overall cost of the loan.
Maximize equity: If you avoid refinancing too early on your existing loan, you can maximize equity and minimize fees. In other words, by waiting to refinance until you've built up significant equity in your home, you can borrow more while still keeping your loan-to-value ratio manageable.
Get Professional Guidance
A cash-out refinance can feel overwhelming with all the options and requirements. That's why connecting with a financial advisor or mortgage expert specializing in VA loans is a good idea. They can explain how your situation fits VA guidelines and help you understand details like interest rates, closing costs, and equity access.
With their guidance, you'll be better equipped to decide if refinancing suits your financial goals.
Be sure to shop around and compare rates and services--don't feel tied to your previous lender.
Watch for red flags like promises of unrealistically low interest rates or skipping payments. If it sounds too good to be true, it probably is.
Most lenders should provide a good-faith estimate of closing costs within three business days. If they don't, move on to another lender. Get everything in writing, including interest rates, rate lock periods, and loan details. Verbal agreements are not reliable -- if it's not in writing, it doesn't exist.
Maximizing the Benefits of a VA Loan Cash-Out Refinance
In summary, a VA cash-out refinance offers valuable opportunities for eligible homeowners, but it's essential to:
- Define your financial goals.
- Understand your eligibility and VA loan-specific requirements.
- Shop for competitive rates and terms.
- Assess costs and risks thoroughly.
- Leverage VA loan benefits, such as no PMI and competitive rates.
- Get all your paperwork ready first.
- Strategically time your refinance.
By following these steps and seeking professional advice, you can make an informed decision and unlock the full potential of your VA loan benefits.
How Much Home Can You Afford?
What kind of home can you afford through your VA home loan benefit? Use our calculator to estimate your payments for different scenarios and find providers that offer VA loans and/or conventional mortgages and work with active military and veterans.
