Maybe you weren’t made aware of the incredible advantages of your VA Home Loan benefits when you bought your first house, so you took out a conventional loan. You’re not alone. Many veterans and active-duty servicemembers don’t realize that the Veterans Administration offers government-backed loans with huge perks that include no PMI (private mortgage insurance), lower interest rates, and no down payments. The good news is that even if you have a conventional loan – any conventional loan at all – you can swap it out for a brand new VA Home Loan.
With the Fed raising interest rates, you might wonder if it’s wise to refinance in the current climate. We’ve got the answers to that, and other questions homeowners are currently asking about trading their traditional loan for a VA Home Loan. Take a look, and then you can decide if refinancing to a VA Loan makes sense for your circumstances – and your wallet.
Why would I refinance my conventional mortgage to a VA Loan when the interest rates are on the rise?
Believe it or not, this might be the ideal time to consider a change. Sure, interest rates are climbing, but that doesn’t mean you shouldn’t consider refinancing your home loan. As with most situations, timing is everything, and no matter what kind of mortgage you have, if the interest rates are at least a point lower now than they were when you took out your loan, refinancing might be worth doing. And don’t forget, eliminating PMI, which you can with a VA Loan, will save you thousands of dollars over the life of your loan.
If I refinance for the same number of years, won’t I just be extending my payment date?
Yes. On the one hand, refinancing for the same number of years extends your payment date. But, on the other hand, you’ll end up with a lower monthly payment. Or, if your circumstances permit, you can pay more than your stated monthly payment to reduce the number of years you owe on your home.
What are my options if I want to replace my non-VA mortgage with a VA Loan?
You have a single option, but it’s a good one. If you qualify, you can collect the benefits of a VA-backed loan by refinancing into a VA Cash-Out, which offers Veterans and active-duty servicemembers a brand new loan with lower interest rates, no PMI, and, if they choose, cash back at closing. In addition, in most states, the VA Cash-Out refinance allows up to 100 percent financing, which lets you take advantage of all of your home’s equity.
How does a VA Cash-Out refinance work?
A VA Cash-Out refinance replaces your existing mortgage with a new VA Home Loan. As for the cash-out aspect, the new VA Loan will generally have a larger amount than your current loan, allowing you to receive cash back at closing by cashing out some of your home’s equity.
So, exactly how much cash could I take out?
It depends on how much equity you’ve accrued. For example, let’s say that your home is worth $450,000, and you owe $250,000 through your non-VA Loan. You could open a VA Cash-Out refinance for up to $450,000 and receive $200,000 cash back at closing – minus closing costs, of course.
Can I use the cash for whatever I want?
Sure. It’s your money. However, you might want to consider paying off debts, or using it for home improvement projects, tuition, maybe even investing in real estate rather than blowing it on a quickly depreciating item like a hot sports car.
Do I have to take cash back at the closing?
Not at all. You don’t have to take any cash out to replace your conventional loan with a VA Cash-Out refinance. Instead, you may simply use the VA Cash-Out refinance to swap out your current loan to take advantage of lower interest rates if yours were higher when you took out your original loan.
What are some of the other benefits of a VA Cash-Out refinance?
- For those who want money back, the VA Cash-Out refinance allows borrowers to quickly access substantial amounts of cash because they can receive 90 to 100 percent of their equity as cash back at closing. (Check with your lender as some might allow a different percentage.)
- Eligible Veterans and active-duty servicemembers can refinance any non-VA loan, including an FHA or conventional, into a VA Loan.
- Borrowers can kiss mortgage insurance goodbye if they currently have an FHA, USDA, or conventional loan with PMI.
How do I qualify for a VA Cash-Out refinance?
You’ll need to meet minimum guidelines set by the Department of Veterans Affairs and individual lenders. But you can expect to provide the following:
- A credit score of at least 580-620 (different lenders may have their own requirements)
- A debt-to-income ratio (DTI) under 41 percent in most cases
- Sufficient home equity if you plan to take cash out. Some lenders may require you to leave at least 10 percent of your home equity.
Is the VA Cash-Out refinance available to all servicemembers?
To use the VA Cash-Out loan program, you must have an eligible military service history. So, first, apply for your Certificate of Eligibility (COE). Eligibility depends on the amount of time served and the period in which you served. You’re probably eligible if you’ve served:
- 90 days in wartime and are now separated
- 90 days and are still on active duty
- 181 days in peacetime and are now separated
- Two years if enlisted in the post-Vietnam era
- Six years in the National Guard or Reserves
- Or, if you are a surviving spouse
- And if you will live in the home you’re refinancing
If you’re unsure of your eligibility status, Aligned Mortgage can quickly check that for you. And if you have any US military experience, don’t hesitate to check your eligibility for a VA Loan. You don’t want to pass on benefits that can save you money.
Are there any disadvantages of taking a VA Cash-Out refinance?
You’re taking out a brand new loan, so you’ll have to get a VA appraisal, and you’ll have to go through the same process as with any home loan application. You’ll provide the same paperwork and employment and income history that you handed over for your original loan. Borrowers must fully qualify for the loan based on their credit, income, and equity in the property. A VA Cash-Out refinance includes the same underwriting criteria as with any other VA Loan, and you’ll pay a funding fee and closing costs.
What is a funding fee?
The VA funding fee is a one-time payment that the Veteran, servicemember, or survivor pays on a VA-backed or VA Home Loan. This fee helps lower the loan cost for US taxpayers since the VA Home Loan program doesn’t require down payments or monthly mortgage insurance (PMI).
How much is the funding fee?
For non-VA Loan holders using the cash-out refinance to switch into a VA Loan for the first time, the funding fee is equal to 2.3 percent of the loan amount. The VA funding fee is waived for disabled Veterans and eligible surviving spouses.
Final thought
The VA Cash-Out refinance allows Veterans and active-duty servicemembers to refinance any non-VA Loan into a new VA-backed loan with a lower interest rate and the option of cash back. VA interest rates are typically the lowest in the market, thanks to the Department of Veterans Affairs backing. For current VA refinance rates and to see if the VA Cash-Out refinance is right for you, please don’t hesitate to contact Aligned Mortgage. We can help you run the numbers to ensure that you make the best financial decisions regarding your loan.
