A recent study by Black Knight Data & Analytics states that “As home prices continued their upward trajectory at the national level, the amount of tappable equity available to homeowners with mortgages continued to rise as well.” This study defines “tappable equity” as only 80% of the homes’ value minus the mortgage balance. The amount of “tappable equity” is estimated at $5.4 Trillion. That is Trillion with a “T”, which exceeds pre-recession levels. Well, Veterans have the advantage of accessing up to 100%, rather than 80%, of the value in their home. So, why would Veteran homeowners look into a VA cash-out refinance?
VA Cash Out Refinance Benefits
Compared to other loan types, probably the biggest advantage VA loans have on a refinance is the ability to borrow up to 100% of the appraised value. Conversely, conventional and FHA loans cap at 85% of the value. Therefore, non-Veterans must obtain a separate home equity loan or line to access over 85% of the value. It is even possible to exceed the conforming loan limits on a VA cash-out refinance loan. In these cases, a VA jumbo loan would limit the equity access to less than 100%. The VA loan amount and percentage of the value depends on the Veteran’s entitlement available.
The next huge advantage is that VA loans do not have monthly mortgage insurance or PMI fee. That means that even though the borrower is financing over 80%, the monthly payment will not include monthly PMI like other loans. Although, VA loans do require a VA funding fee of 2.15 – 3.3% generally financed on top of the base loan amount. UNLESS the Veteran is exempt from the funding fee because of a VA disability. When exempt from this cost, then VA widens the gap even further when compared to other loans.
Reasons for a VA Cash Out Refinance
So, this sounds like a pretty strong option, right? Then, let’s explore the reasons a Veteran homeowner may access their home equity in a refinance. Benefits include:
- Refinance a conventional, USDA, or FHA loan
- Pay off other debts
- Cash for home improvements
- Cash in hand
- Down payment for a second home or rental purchase
- Pay off a construction loan
Refinance a conventional, USDA, or FHA loan. For various reasons, a Veteran may have something other than a VA loan. Maybe the eligibility was tied up at the time the mortgage was obtained. What if the Veteran put down 20% or more and wanted to save their VA eligibility? Maybe paying the funding fee wasn’t the best scenario then.
Pay off other debts. Maybe because of paying down the mortgage balance and an increase in appraised value, there is sufficient equity that could be used for consolidating debts. Paying off higher interest rate cards, loans, tax liens, home equity line of credit, mortgages on another property, or more could make sense. Among other things, paying off debts could increase cash flow for the household, but always think through adding unsecured debt to your home. If the mortgage is not paid on-time, then it could result in a foreclosure.
Cash for home improvements. Are there improvements or additions desired for the home? Often there are home improvement projects such as a kitchen or bathroom remodel, but cash is not available to make the improvements. If the cash is available, it could still make sense to include it in the mortgage instead. With equity in the home accessed by a VA cash-out refinance, it could allow the funds needed. Although, keep in mind that the home must be in good condition at the time of the appraisal. Additionally, there can be no work in progress at the time of the appraisal.
Cash in Hand. Sometimes there are just reasons to get cash. Maybe it is to pay a large IRS bill due, help a relative with a situation, pay for college rather than a student loan, or others. For the most part, cash may be received by the borrower from a refinance.
Down Payment for a Second Home or Rental. Let’s say a Veteran wants to buy a vacation home or start investing in rental properties. Well, a cash-out refinance could allow the Veteran to access the down payment funds for this purchase. A mortgage on the new property could be combined with the cash from the VA refinance to make the purchase.
Pay off a Construction Loan. A popular benefit of a VA refinance loan is that it will pay off a construction loan used to build a primary residence. The construction loan helps build the home and VA will lend up to 100% of the appraised value to pay off the construction. The value is based on the “as completed” value too. This is a great advantage over other types of loan which require equity in the property or down payment to pay off construction loans.
VA Funding Fee for VA Cash Out Refinance Loans
As mentioned before, VA loans typically have a funding fee which may be financed into the loan. The amount of the VA funding fee is based on several factors including the type of military, first or subsequent use, and disability status. VA purchase loans allow for a reduced fee of 5% or more equity. Although, cash out refinancing does not offer this discount. Below is a chart which shows the VA cash-out refinance funding fee requirements.
Other VA Cash Out Refinance Tips
Just like a VA purchase loan, there must be a clean termite report. Unlike a purchase where the Veteran is not allowed to pay for the termite inspection, they do on this refinance loan type.
Additionally, there will be a VA appraisal to determine the value as well as the condition of the home. Along with the Veteran’s entitlement, credit, mortgage balance, and income, the home’s value determines how much the VA loan may be. It also determines the amount of cash out. To have your home ready for the VA appraiser and to safeguard against a re-inspection, which causes potential delays plus extra costs, read, “12 Things To Check For Before Your VA Appraisal”.
Not Enough Equity for Home Improvements? Our VA renovation loan helps Veterans finance home improvements and repairs into a VA loan up to 100% of the appraised value. Plus, it will even use the “as completed” appraised value which could help the low equity situation.
Want to learn more about a VA loan? Contact an OVM Financial loan officer.