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Is a VA Cash-Out Refinance a Good Idea?
By Aly J. Yale MONEY RESEARCH COLLECTIVE
If you’ve been in your home a while, and so have paid down your mortgage a bit, you’ve probably built up some home equity. With a VA cash-out refinance, you can turn some of that equity into cash, which you can use for things like home repairs or paying off debts.
Are you interested in using a VA cash-out refinance to tap your home equity? Here’s how they work and who qualifies for one.
Table of contents
- How does a VA cash-out refinance work?
- Who is eligible to get a cash-out refinance loan?
- What are the benefits of a VA cash-out refinance loan?
- When is a cash-out refinancing loan a good idea?
- How to apply for a cash-out refinance loan?
- How long does it take to get a VA cash-out refinance?
- Should you tap all your equity in a VA cash-out refinance?
- VA cash-out refinance FAQs
- Summary of our guide to VA cash-out refinance
How does a VA cash-out refinance work?
A cash-out refinance involves replacing your existing mortgage with a new one that has a larger balance. The new loan then pays off your current mortgage balance, and you get the remainder back in cash.
You can use a VA cash-out refinance on an existing VA loan or on other types of loans — like FHA and conventional mortgages — as long as you meet VA loan requirements. This means you’ll need to be a veteran or active-duty military service member and have a certain service record. (We’ll delve more into this further down.)
Who is eligible to get a VA cash-out refinance loan?
To be eligible for a VA loan refinance with cash-out, you first need to be a military veteran or an active duty service member.
Beyond this, you will also need to:
- Meet certain service requirements: For current service members, it’s at least 90 continuous days. For veterans, the requirements depend on the dates of your service and your rank. You can see the full breakdown of VA loan service requirements at VA.gov.
- Qualify for a COE: You’ll need to obtain a Certificate of Eligibility from the Department of Veterans Affairs. You can apply for this in your eBenefits portal or your lender can request it on your behalf.
- Have a debt-to-income ratio of 41% or less: The VA’s maximum DTI is 41%, meaning your debts (including your new mortgage payment) can account for no more than 41% of your monthly income. You may be able to get approved with a DTI beyond this, but exceptions are determined on a case-by-case basis.
- Have a decent credit score: You don’t need perfect credit to get a VA loan (or refinance with cash out), and the VA technically doesn’t have a minimum credit score requirement. Individual VA lenders, though, do have minimums. Most will require at least a 620 for VA loans, possibly higher on cash-out refinances (due to their higher risk).
There are other parties who may qualify for a VA loan, too. If you’re a National Guard or Reserve member, you may also be eligible, depending on your service record. Surviving spouses of POWs, veterans killed in the line of duty or veterans who died due to service-related injuries are also eligible in many circumstances.
What are the benefits of a VA cash-out refinance loan?
There are lots of benefits to getting a VA loan refinance with cash out. For one, interest rates are lower than cash-out options on other loan programs. You can also access more of your home’s equity value (up to 100% of it, in fact).
Here are some of the potential benefits of a VA cash-out refinance loan:
- Access to cash: The main benefit of a VA cash-out refinance loan is the ability to access cash from your home’s equity. This can be useful for home improvements, debt consolidation or other large expenses.
- Lower interest rates: VA cash-out refinance loans generally offer lower interest rates than other types of loans, such as personal loans or credit cards. This can potentially save you money over the long term.
- No mortgage insurance: Unlike other types of loans, VA cash-out refinance loans do not require mortgage insurance. This can result in significant savings over time.
- Flexible repayment terms: VA cash-out refinance loans offer flexible repayment terms, allowing you to choose a repayment schedule that works for you.
- Potential tax benefits: In some cases, the interest paid on a VA cash-out refinance loan may be tax-deductible. Consult with a tax professional to learn more.
When is a cash-out refinancing loan a good idea?
A cash-out refinance can be a good idea in many cases, but it’s not right for everyone.
For example, a VA cash-out refinance may be right if:
- You need more cash: Since VA cash-out refinancing allows for up to 100% financing, you can usually get more cash than with other refinancing options.
- You’re considering credit cards, personal loans or cash-out FHA/conventional loans: These options will typically have higher interest rates than VA loans, so if you’re considering one, a VA cash-out may be a more affordable choice.
- You want to fund home improvements: As long as you use the funds toward renovations that increase your home’s long-term value, a VA cash-out can be a smart financing option.
- You have a non-VA loan and want to refinance into a VA-backed mortgage: Refinancing into a VA loan might help you avoid private mortgage insurance (PMI) or lower your mortgage rate — since VA rates tend to be lower than other home loan types.
- You need to pay off high-interest debt: VA loans can be great debt consolidation tools. Because they have lower interest rates than most other financial products — including personal loans and credit cards — using funds from a VA cash-out to pay off these types of balances (basically rolling them into your VA loan) can save you interest in the long run.
If, by contrast, you fall into one of these categories, a VA cash-out refinance may not be the best fit:
- You don’t have cash for closing costs: When you use a VA cash-out refinance loan, you can roll your VA funding fee into the balance — but you can’t finance all your other closing costs. These additional costs can amount to anywhere from 2% to 5% of your loan amount, so you’ll need a good amount of cash on hand to cover them.
- You need money for living expenses or bills: If you’re short on funds for everyday bills, a cash-out refinance — VA or otherwise — isn’t the solution, as it will only add to your monthly costs and long-term expenses. In this case, you may want to speak to a credit counselor or financial professional to get help with budgeting.
- Your credit score has dropped since you got your last mortgage: VA loans have lower mortgage rates than most, but if your credit score has dropped since you initially got your mortgage, refinancing may actually mean an increase in your interest rate — and monthly payment.
If you’re not sure if a VA cash-out refinance is the right move, speak to a mortgage professional. They can make recommendations for your specific financial situation.
How to apply for a VA cash-out refinance loan
To get a cash-out refinance VA loan, your first step is to find a VA-approved lender, as not all mortgage companies can issue these types of loans. If you already have a VA home loan, you can refinance with your current lender — but you don’t have to.
When refinancing, you can — and should — shop around between mortgage companies. This will ensure you get the most competitive rate and best loan for your needs.
Once you have a lender in mind, here’s how to refinance a VA loan with cash out:
- Get your Certificate of Eligibility: You can request this from the VA in your eBenefits portal or ask your lender to request it on your behalf. The latter may be quicker, as lenders have an automated system they can use to streamline COE requests.
- Fill out your application: You’ll need to provide information about your income, agree to a credit check, and submit financial documents like W-2s, tax returns, pay stubs and more.
- Close on your loan: Once your loan is approved, you’ll get a closing date. This is when you’ll sign your papers and pay your closing costs. Your new loan will be used to pay off your old one, and you’ll get your cash-out proceeds shortly after.
If you’re not sure what company to use for your VA cash-out refinance, see our list of the best VA loan lenders.
How long does it take to get a VA cash-out refinance?
A VA cash-out won’t be the fastest loan option out there. Due to the COE requirement, as well as the need for a VA appraisal, the process usually takes from 45 days to two months to complete.
If you’re looking for a faster VA refinance, try the Interest Rate Reduction Refinance Loan (also called the VA streamline refinance or IRRRL). These don’t require appraisals and tend to move much faster.
Should you tap all the equity in a VA cash-out refinance?
A cash-out refinancing involves deciding how much of the equity in your home you want to access. That amount is then available as cash on top of the balance on your mortgage. VA loans allow for 100% financing. That means when you refinance a VA loan with cash out, you can technically tap into all of your home’s equity.
Just keep in mind: This doesn’t necessarily mean you’ll get approved for a loan of this size. Your lender will still need to see that you have the income to comfortably cover your new payments, along with any other debts you have. Your credit score and other factors will come into play, too.
What’s the risk of putting equity into a VA cash-out refinance?
If you can qualify to tap all of your home equity, make sure you understand the risks before moving forward. For one, home values could drop. Should that happen, you may owe more than your home is worth. This would make it difficult to sell your home and make enough to repay your mortgage.
Worse than this, you could over-leverage yourself. If your income changes, you may find yourself unable to afford your new, higher payments. This would put your home at risk of foreclosure.
If you do opt to tap all your equity with a cash-out refinance VA loan, make sure you can safely cover the payments for the foreseeable future. Having a solid savings account or emergency fund can help here.
When is a cash-out refinancing loan a good idea?
A cash-out refinance can be a good idea in many cases. That said, it’s not right for everyone.
For example, a VA cash-out refinance may be right if:
- You need more cash: Since VA cash-out refinancing allows for up to 100% financing, you can usually get more cash than with other refinancing options.
- You’re considering credit cards, personal loans or cash-out FHA/conventional loans otherwise: These options will typically have higher interest rates than VA loans. If you’re considering using one of them, then, a VA cash-out may be a more affordable choice.
- You want to fund home improvements: As long as you use the funds toward renovations that increase your home’s long-term value, a VA cash-out can be a smart financing option.
- You have a non-VA loan and want to refinance into a VA-backed mortgage: If you’re in this boat, refinancing into a VA loan might help you avoid private mortgage insurance (PMI) or lower your mortgage rate.
- You need to pay off high-interest debt: VA loans can be great debt consolidation tools. They have lower interest rates than most other financial products, including personal loans and credit cards. Because of that, using funds from a VA cash-out to pay off these types of balances (basically rolling them into your VA loan) can save you interest in the long run.
If, by contrast, you fall into one of these categories, a VA cash-out refinance may not be the best fit:
- You don’t have cash for closing costs: When you use a VA cash-out refinance loan, you can roll your VA funding fee into the balance — but you can’t finance all your other closing costs. These additional costs can total anywhere from 2% to 5% of your loan amount, so you’ll need a good amount of cash on hand to cover them.
- You need money for living expenses or bills: If you’re short on funds for everyday bills, a cash-out refinance — VA or otherwise — isn’t the solution. Using one for such everyday spending will only add to your monthly costs and long-term expenses. In this case, you may want to speak to a credit counselor or financial professional to get help with budgeting.
- Your credit score has dropped since you got your last mortgage: VA loans have lower mortgage rates than most. However, if your credit score has dropped since you initially got your mortgage, refinancing may result in no savings. Indeed, you’d actually see an increase in your interest rate — and monthly payment.
If you’re not sure if a VA cash-out refinance is the right move, speak to a mortgage professional. They can make recommendations for your specific financial situation.
Who is eligible to get a VA cash-out refinance loan?
To be eligible for a VA loan refinance with cash-out, you need a strong military connection. Specifically, you generally need to be either serving in some capacity or be a qualified veteran.
Beyond this, you will also need to:
- Meet certain service requirements: For current service members, it’s at least 90 continuous days. For veterans, the requirements depend on the dates of your service and your rank. You can see the full breakdown of VA loan service requirements at VA.gov.
- Qualify for a COE: You’ll need to obtain a Certificate of Eligibility from the Department of Veterans Affairs. You can apply for this in your eBenefits portal or your lender can request it on your behalf.
- Enjoy a debt-to-income ratio of 41% or less: The VA’s maximum DTI is 41%, meaning your debts (including your new mortgage payment) can account for no more than 41% of your monthly income. You may be able to get approved with a DTI beyond this, but exceptions are determined on a case-by-case basis.
- Have a decent credit score: You don’t need perfect credit to get a VA loan (or refinance with cash out), and the VA technically doesn’t have a minimum credit score requirement. Individual VA lenders, though, do have minimums. Most will require at least a 620 for VA loans, possibly higher on cash-out refinances (due to their higher risk).
There are other parties who may qualify for a VA loan, too. If you’re a National Guard or Reserve member, you may also be eligible, depending on your service record. Surviving spouses of POWs, veterans killed in the line of duty or veterans who died due to service-related injuries are also eligible in many circumstances.
How to apply for a VA cash-out refinance loan
To get a cash-out refinance VA loan, your first step is to find a VA-approved lender, as not all mortgage companies can issue these types of loans. If you already have a VA home loan, you can refinance with your current lender — but you don’t have to.
When refinancing, you can — and should — shop around between mortgage companies. This will ensure you get the most competitive rate and best loan for your needs.
Once you have a lender in mind, here’s how to refinance a VA loan with cash out:
- Get your Certificate of Eligibility: You can request this from the VA in your eBenefits portal or ask your lender to request it on your behalf. The latter may be quicker, as lenders have an automated system they can use to streamline COE requests.
- Fill out your application: You’ll need to provide information about your income, agree to a credit check, and submit financial documents like W-2s, tax returns, pay stubs and more.
- Close on your loan: Once your loan is approved, you’ll get a closing date. This is when you’ll sign your papers and pay your closing costs. Your new loan will be used to pay off your old one, and you’ll get your cash-out proceeds shortly after.
If you’re not sure what company to use for your VA cash-out refinance, see our list of the best VA loan lenders.
VA cash-out refinance FAQs
Should you tap all the equity in a VA cash-out refinance?
Whether or not to tap all the equity in a VA cash-out refinance is a decision that should be made after careful consideration of your financial goals, current and future needs, and overall financial situation. It's generally not recommended to tap all the equity in your home unless you have a clear plan for how you will use the funds and a way to pay back the additional debt.
What are the interest rates for a VA refinance cash-out?
With a VA loan refinance, cash out or otherwise, rates are going to be lower than most other options. The exact rate you'll get will depend on your lender, credit score, loan term, loan amount and other details.
How much can you take out on a VA cash-out refinance?
With any VA mortgage, you're technically allowed a 100% loan-to-value ratio (LTV) — meaning you can borrow up to 100% of your home's appraised value. This means you could potentially pocket the entire value of your home minus your existing mortgage balance.
Here's an example: If your home were worth $400,000, and you had a mortgage balance of $250,000, you could potentially access up to $150,000 (400,000 - 250,000) using a VA cash-out refinance.
Remember that not all borrowers will qualify for 100% financing. Your credit score, income, mortgage loan amount and other details will all influence how much your lender will agree to loan you.
What's the risk of putting equity into a VA cash-out refinance?
The risk of putting equity into a VA cash-out refinance is that it can increase your monthly payments, result in long-term debt, reduce your equity, and put you at risk of foreclosure. When you take out a VA cash-out refinance, you are essentially borrowing against the equity in your home, which means you are increasing your mortgage debt and your monthly payments. If you take out too much equity, you may end up with a monthly payment that is difficult to manage. Additionally, a VA cash-out refinance can extend the life of your mortgage, which means you'll be paying off the debt for a longer period of time and paying more in interest over the life of the loan.
Should I pick a HELOC or a cash-out refinance?
When comparing a home equity line of credit (HELOC) vs. cash-out refi , it's important to think about your financial needs.
With a HELOC, you get access to a line of credit you can withdraw from as needed. A cash-out refinance, on the other hand, offers a one-time lump sum.
So, if you're not sure how much you need or you need money over an extended period of time, a HELOC can be smart. If you simply need a large chunk of change all at once, a cash-out can help.
Another factor to consider is the interest rate. HELOCs typically have variable rates, which means your rate and monthly mortgage payments can go up or down many times over the course of your loan. VA cash-out refinances are fixed-rate loans, so your rate (and payments) will remain consistent for the entire life of the mortgage.
Finally, a mortgage refinance replaces your existing loan, so you'll still continue to have just one monthly mortgage payment. HELOCs and home equity loans are second mortgages. This means you'll have two monthly payments moving forward.
Summary of our guide to a VA cash-out refinance
If you’re a military servicemember or veteran looking to cash in on your home equity, a VA cash-out refinance loan may be a good option. Compared to other types of cash-out loans, you’ll enjoy lower interest rates, and you can tap up to 100% of your home’s value.
Just keep in mind the risks of borrowing against your home equity. If you borrow too much, you could end up owing more than your home’s worth. Worse, you might even find yourself unable to make your payments. Always talk to a mortgage advisor to make sure a cash-out refinance VA loan is the right move for your financial situation.
