VA Loan Refinance
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VA Cash-Out Refinance
Do you remember how many homeowners used to use their homes as personal ATMs before the credit crunch and Great Recession? They would refinance whenever they needed cash to enjoy an otherwise unsustainable lifestyle.In the long term, that’s not a good financial strategy. Every time you refinance, you reset the clock on your mortgage, usually starting a 30-year term all over again. If you keep doing that, you could find yourself making mortgage payments until your dying day. Also, each refinance brings new closing costs that eventually have to be paid down.
However, there’s nothing wrong with occasionally using a VA cash-out refinance as a tactic within a thought-through financial strategy. That’s especially true if you’re improving your finances because you want to consolidate debt or grow your business. It can also be useful if you need money for something that’s important to you, but less “virtuous” for your personal economy – such as your or an offspring’s wedding or college fund.
Get More Money Out of a VA Cash-Out Refinance
Over the years, you may have built up “equity” (the amount by which the current appraised value of your home exceeds your current mortgage balance) in your home in two main ways:
- Paying down your “principal debt” (the amount you originally borrowed) through monthly payments
- Home price inflation in your area
A typical cash-out refinance will let you access only some of that equity. A VA cash-out refinance, however, often lets you get your hands on 100 percent of your money as long as the amount does not exceed your property’s value.
For example, if your home was appraised at $200,000, you have a remaining mortgage balance of $150,000, and closing costs from the refinance come out to $5,000, you’ll be able to take home $45,000 if you choose to cash out 100 percent of your home’s equity. Of course, you don’t have to take out all your equity and, if you’ve any choice, it’s probably better over the long term not to do so. However, it’s there if you need it.
Eligibility for a VA Cash-Out Refinance
Unlike an IRRRL, you’re going to be changing the terms of your mortgage, so you’re pretty much going to be starting over. In fact, your existing mortgage doesn’t even have to be a VA loan for you to execute a VA cash-out refinance. However, that fundamental change means that you may be asked for your veteran’s certificate of eligibility. It also means that this refinance option is available on the same basis as an original VA purchase loan.
The VA has caps on the amount it will guarantee on any one loan. In theory, you can borrow more, but, in practice, very few lenders will breach those caps. In 2017, VA loan limits are $424,100 for a one-unit home in most areas, but it could be higher if you want to buy in an area designated as one with high home prices.
The loan process for a VA cash-out refinance is very similar to that of a VA purchase mortgage. You’ll need:
- An independent appraisal of your home’s value
- Proof of income (pay stubs, W2s and maybe tax returns)
- Bank statements
- A detailed list of your existing non-mortgage debts
- Proof that you can comfortably afford your new monthly payments
- Have a reasonable credit score (maybe 620+, though some lenders may be more or less easygoing)
- Proof that the home you’re refinancing is currently your main place of residence
You won’t be able to roll up your closing costs into the new loan like you can with an IRRRL. However, you can normally pay them from the cash you take out.
It typically takes a few extra days to close on a VA cash-out refinance compared to other types of refinance programs. Ellie Mae reported that the average closing time was 58 days in January 2017, five days longer than the average refinance overall.
Options within the VA Cash-Out Refinance
You don’t have to refinance to a mortgage that is similar to the one you have. You can use this as an opportunity to get a different loan option that suits you best.
Just as with an IRRRL, you can switch from an ARM to an FRM – or, more rarely, the other way around. You can also choose a different term. If you can afford the higher monthly payments, changing to a 15-year mortgage from a 30-year mortgage can save you serious money in the end.