Are you looking to tap into your home equity? The VA does not offer home equity loans or lines of credit, but a cash-out refinance could be viable. Keep reading to learn more about the specifics, how they’re commonly used, eligibility guidelines and the application process.
What is a VA Home Equity Product?
The VA cash-out refinance is the sole home equity product. It is a type of mortgage that lets you convert your home equity into cash. You can borrow more than you currently owe and receive the remaining amount in cash once the new lender pays off your current mortgage.
How Do VA Home Equity Products Work?
When you take out a VA cash-out refinance, it replaces your current loan with a new, larger one. You receive the difference in cash and can use the funds however you see fit. These loans can also be used to refinance a non-VA loan into a VA-backed loan.
Common Uses of VA Home Equity Products
Borrowers often use VA cash-out refinances to fund costly home improvements, consolidate high-interest debt or cover education or emergency expenses.
Home Renovations and Repairs
You can upgrade your kitchen, remodel your bathroom or fix structural issues, to name a few. These home improvement projects and others help improve your living space and can also increase your home’s market value, which means more money in your pocket if you decide to sell.
Debt Consolidation
VA home equity loans can also be a smart move to consolidate expensive debt. If you have high-interest debts, like credit card balances, consolidating them into a single loan with a lower interest rate can save you money. This makes monthly payments more manageable, as you’ll pay a single creditor instead of several each month. And you’ll possibly pay your debts off faster while saving a bundle in interest.
Education Expenses
Education expenses can put a significant strain on your budget. Using a VA home equity loan can help cover costs like tuition, books and other fees. Depending on the interest rate you’re eligible for, this option can be more affordable than traditional student loans.
Emergency Expenses
Unexpected expenses can arise at any time. With a VA home equity loan, you can have a financial cushion when life happens to cover emergencies like medical bills, car repair or job loss. This helps you avoid dipping into your savings or using high-interest credit cards.
Having access to funds for emergencies can also provide peace of mind by providing the funding needed to handle financial surprises without blowing up your budget.
Eligibility Criteria for VA Home Equity Products
You must meet the following criteria to be considered for a VA cash-out refinance:
- Have a VA-backed loan Certificate of Eligibility (COE)
- Meet the lender’s credit, income and other financial standards
- Plan to occupy the home as your primary residence for at least one year
The Pros and Cons of VA Home Equity Products
Like any mortgage product, VA cash-out refinances come with benefits and drawbacks to consider before applying.
Pros
- No private mortgage insurance (PMI) requirement: With VA home equity loans, you don’t have to pay for private mortgage insurance. This is a major upside, as you’ll save hundreds each month on your monthly mortgage payments and several thousands of dollars over the life of the loan.
- High loan-to-value (LTV) ratio: The VA allows you to borrow up to 100% of your home’s appraised value, but lenders have the ability to determine the maximum lending threshold. This means you might access more funds compared to typical home equity loans that usually limit your borrowing power to 80 or 90%.
- Competitive interest rates: VA home equity loans often have lower interest rates than other home equity loans. This means you’ll get lower borrowing costs, making home equity products more affordable.
- Flexibility: Lenders generally don’t impose spending restrictions. So, you can use the funds for several reasons, whether it’s to fund costly home improvements, pay off high-interest debt, make big-ticket purchases or cover other pressing financial needs.
Cons
- VA funding fee: VA loans come with a funding fee that can be rolled into the loan but still adds to your borrowing costs.
- Higher closing costs: Compared to standard refinancing, VA home equity loans might have higher closing costs.
- Risk of foreclosure: Since your home secures the loan, missing payments can lead to foreclosure.
- Credit score requirements: While the VA doesn’t set a minimum credit score, lenders generally require a credit score of at least 640, which could be a bit restrictive for some borrowers.
Application Process for VA Home Equity Products
When you’re ready to apply, here’s how to move forward.
Preparing Your Documents
Start by gathering the documents the lender will need to process your loan application. Here’s what you’ll need:
- Proof of military service: Your Certificate of Eligibility (COE) to confirm your VA loan eligibility
- Income statements: Recent pay stubs, tax returns, and any other proof of income.
- Credit reports: Current credit reports to provide a clear picture of your financial health
- Property documents: Mortgage statements and property tax documents
Finding a Lender
Private lenders, including banks, credit unions, and online mortgage firms, offer VA cash-out refinances. To find the right one, compare rates and fees and check reviews to get a feel for the lender’s reputation. Also, keep in mind that some lenders offer special programs tailored for veterans. Even if you find a lender that doesn’t, they should have extensive experience originating VA-backed loan products.
Application Steps
With your documents in order and a lender chosen, it’s time to start the application. Complete it online or in person, and review your entries for errors or omissions. Upon submission, the lender will review your application and may request additional documents before making a decision. Promptly provide any additional information the lender requests to avoid delays.
Loan Approval and Closing
If approved, you’ll receive a loan estimate outlining the terms and closing costs. Be sure to ask the lender any questions you may have before moving on to the next step in the lending processing, which is the closing. After closing, the funds will be disbursed to you.
VA Home Equity Products Interest Rates and Terms
Factors Affecting VA Home Equity Loan Rates
Your credit score and DTI play a role in the rates you’ll receive for a cash-out refinance. Loan-to-value (LTV) ratios and market conditions are also other factors lenders consider when setting rates.
Typical Loan Terms
You’ll get a fixed interest rate and a loan term of up to 30 years. Keep in mind that an extended term gives you more affordable monthly mortgage payments, but you’ll pay more in interest over the life of the loan.
Comparing VA Home Equity Products with Other Options
VA Cash-Out Refinance vs. Home Equity Loan
The VA cash-out refinance lets you swap out your current mortgage with a larger one and withdraw the difference in cash. Depending on lender policies, you can borrow up to 100% of your home’s value, which offers significant flexibility if you have substantial equity.
By contrast, a home equity loan is a second mortgage that you can take out on top of your existing mortgage. This means you will manage two separate loan payments instead of having to refinance your current loan.
Home equity loans provide a lump sum, which can be beneficial for large expenses. However, they often come with higher interest rates and more stringent lending guidelines.
Both options have their benefits, but choosing the right one depends on your financial situation, credit score and the specific terms you’re eligible for.
Frequently Asked Questions (FAQs) About VA Home Equity Products
The amount you can access through a home equity loan product is based on the amount of equity you have in your home and other financial factors.
VA home equity products come with closing costs, which can include origination fees, appraisal fees and other lending fees. The amount you’ll pay depends on the lender you select, but it is commonplace with these loan products.
