VA cash out refinance can be a tool that many are not aware of when enacted a buyer can have more cash on hand to purchase their next investment.
My first cash out refinance was admittedly a scary move due to my beliefs that debt is bad! With many rules and a lot of people who didn’t understand or agree with the investing journey I was about to go on, it was a lonely world to talk with people about how I could take $40K out of my current VA loan and reinvest.
I kept doing the math on my makeshift spreadsheet and it worked. Also, just a plug for education really quick! Education comes with tools in most of the courses out there, don’t be like me, if you are here and you understand what ADPI offers, get the education and the tools, it will undoubtedly save and more importantly earn you time, energy and money!
I just couldn’t see how others did not see what I did, but their doubt caused me doubt. You see when I started buying property the interest rates were not in the 2% range. In fact, my first home was at 4.25% with a lot of cash to buy the rate down, and it was a foreclosure! I was so proud of that rate and it was a normal rate! So when rates like that are “normal” it leaves room to grow and think about the next step. This for me was a cash out refinance and reinvesting the cash into the next big thing!
I knew I wanted to PCS and rent the property out but I had no idea how I was going to do that because I didn’t have money to take care of the place and of course with a renter in there they were going to be less likely to suffer waiting on a fix in the house. So in order to keep the house on my “need to do list” was 1.Beef up the savings account to cover any issues with the house and prepare for the next purchase. That led me to a cash out refinance and that money was the catalyst to seeing how making one move (not favored by some) taking on a debt, I would be in a position to change the trajectory of not only my life but create generational wealth for my family! Let’s get into all the ins and outs of a VA Cash-out Refinance!
What Is A VA Cash-Out Refinance?
VA cash-out refinancing is a way to capitalize on the massive jump in property value that your home has experienced over the past few years! The VA Cash out refinance may be for you if you have a property that has an absurd amount of equity that you can reuse and reinvest. This refinancing option is available to veterans and active-duty military personnel who want to convert their home equity into cash. It allows the borrower to refinance their existing mortgage for an amount that is higher than their current outstanding balance, and then receive the difference in cash.
How Does A VA Cash-Out Refinance Work?
The process for a VA Cash-out refinance is much like a regular refinance. The borrower applies for a new loan with a lender, and the lender will determine the borrower’s eligibility based on factors such as credit score, income, and employment history. If the borrower is approved, they can receive up to 90% of the appraised value of their home, minus any outstanding mortgage balance and closing costs. The borrower can use the cash they receive for any purpose they choose, such as home improvements, debt consolidation, buy the next investment, or other personal expenses. Remember any time you have money you should look at all of the ways you can reinvest in your current debt or bring on more ways to grow your cash flow and wealth!
The VA cash-out Refinancing Process
The VA Cash-out refinance process involves several steps, which are as follows:
1. Determine eligibility: The first step is to determine whether you are eligible for a VA Cash-out refinance. To be eligible, you must be a veteran, active-duty military member or other VA defined military affiliation and meet certain service requirements. You must also have sufficient equity in your home and meet the credit and income requirements of the lender.
2. Find a Lender and apply for a loan: Once you have determined your eligibility, you can apply for a VA Cash-out refinance loan with a lender. You will need to provide documentation, at a minimum such as your military service record, proof of income, and Certificate of Eligibility (COE). In most cases the lender will check your COE to ensure that this is a viable option. The lender will order an appraisal of your property to determine its current value in most cases.
3. Review loan terms: After you have applied for the loan, the lender will provide you with loan terms including the interest rate, loan amount, and repayment terms. You should review these terms carefully and make sure you understand them before proceeding.
4. Close the loan: If you decide to move forward with the loan, you will need to attend a closing where you will sign the loan documents and pay any closing costs, much like your first closing on the property. The lender will then disburse the loan funds, which may include paying off your existing mortgage and providing you with any cash-out amount.
5. Begin making payments: After the loan is closed, you will begin making monthly payments according to the terms of the loan, this will be your new monthly payment which will replace the prior amount. This typically includes paying both principal and interest, as well as any escrow amounts for taxes and insurance.
Who Is Eligible For A VA Cash-Out Refinance?
There are three criteria that borrowers must meet to qualify for this loan:
- You are eligible for a VA-backed home loan Certificate of Eligibility (COE).
- You meet both the VA’s and your lender’s criteria for credit, income, and other requirements.
- You plan to reside in the home you are refinancing with the loan.
VA Cash-Out Refinance Rates Vs. Standard Cash-Out Refinance Rates
Although the difference isn’t significant, cash-out refinance rates are generally higher than rates for rate-and-term refinances. This is because mortgage lenders consider a cash-out refinance to be a higher-risk option as it results in a larger loan balance and smaller equity cushion.
However, VA Cash-out refinance rates tend to be lower than both conventional refinance and new purchase rates due to their backing by the Department of Veterans Affairs. VA refinance loans are generally viewed as less risky by lenders, resulting in lower rates compared to cash-out refinances on conventional home loans. In a market where everything is changing it is advised to look at ALL options! In some cases the buyer in this case can save money by different terms and conditions for different loans. Strategy means running the numbers and learning about the ins and outs of all loan options!
Current VA Cash-Out Rates
Average 30-year refinance rates are near a 20-year high. This is the result of the Federal Reserve’s efforts to combat rampant inflation by increasing its benchmark interest rate seven times last year. And right on cue, the Fed has already announced its first rate hike for 2023, which may lead to some further volatility in mortgage rates. A lender who you should talk to about the rates, and remember nothing is set in stone until you are locked in so make sure you get it in writing as soon as you have that conversation with a lender.
I cannot stress enough, shop for lenders. Do not just end up with one lender and accept that the rate is the best they can give you. Now there will be reasons besides the rate that one may pick one lender over another but at the end of the day you need to look at the costs on paper and you need a lender who will talk you through the process. As an investor you need to have a lender who is doing constant education with you to ensure that you are learning for not only the current product you are buying but they are always looking at your future goals and can get you ready for the next purchase.
How long do you have to wait to get a VA Cash-Out Refinance?
For all cash-out refinances paying off an existing VA loan seasoning certification is required, meaning you must hold the loan and make a certain number of payments before any loan modification will be considered. For a VA cash-out refinance, the number of days from closing of loan being refinanced and loan closing of new loan cannot be less than 210 days, 6 months.
What are the Closing Costs?
Closing costs for a VA cash-out refinance will include many of the same fees associated with conventional loan products, such as appraisal, title search, title insurance, and recording fees. It’s also important to note that The VA limits the amount that lenders can charge borrowers in closing costs to 4%, and they may also offer the option to roll some of these costs into the loan. However, this rule only covers some closing costs, including the VA funding fee. (Of note, the VA funding fee at closing is 2.3% after the first use, and 3.6% for subsequent uses). The rule doesn’t cover loan discount points the buyer elects to pay for to reduce the loan interest rate.
VA Cash-Out Refinance Benefits
This loan option offers several benefits that make it a highly attractive choice for borrowers who are ready to repurpose the money that they receive and reinvest it or hike up their quality of life in another area. Private lenders consider VA refinance loans to be highly secure because they are backed by the US Department of Veterans Affairs, similar to traditional VA loans. As a result, lenders generally have less strict credit requirements and may allow for lower credit scores and incomes compared to conventional refinances. Meeting eligibility requirements for a VA refinance could also result in lower interest rates, especially if you are refinancing from a conventional loan.
In preparation for future refinancing, think about if you have multiple properties and you want to go from a conventional financed loan today to a VA loan in the future, this could help you get large sums of money and you can move it into a VA loan lowering in most cases the fees and sometimes the interest rate. Keep in mind that knowing what you are planning on doing with the money is important!
Drawbacks of a Cash-Out VA Loan Refinance
Like any loan product, there may be some potential negative consequences to consider, such as:
- Increased debt: By refinancing your existing mortgage and taking out cash, you are increasing your overall mortgage debt. This means you will be paying interest on a larger amount for a longer period of time, which could result in higher monthly payments and a larger total amount paid over the life of the loan.
- Higher interest rates: VA Cash-out refinance loans typically have higher interest rates than standard VA refinance loans. This means you may end up paying more in interest over the life of the loan, which can offset the benefits of the cash-out option.
- Closing costs: Like any mortgage refinance, a VA Cash-out refinance will come with closing costs, which can include appraisal fees, title fees, and other charges. These costs can add up quickly and may impact the amount of cash you receive from the refinance.
- Risk of foreclosure: If you are using a VA Cash-out refinance to pay off other debts, such as credit cards or personal loans, you are shifting unsecured debt to secured debt. This means that if you are unable to make your mortgage payments, you could be at risk of foreclosure, which could result in the loss of your home.
VA cash-out Loan Limits
For a no-down payment loan, you are typically able to borrow up to the conforming loan limit set by Fannie Mae/Freddie Mac in most areas, and in some high-cost counties, you may be able to borrow even more. If you wish to make a down payment, you have the option to borrow more than this limit. Typically the loan amount will be 90% of the appraised value. This will be highly dependent on the loan officer you are working with and what products they can offer you. Your current financial situation will play a role in determining your eligibility for the amount you can refinance and money you can borrow in a cash-out refinance.
Overall, with a solid strategy and the right education a cash out refinance where you acquire the means to buy your next property may be a money maker in the long run! Know what that cash-out will cost you upfront and over the years!
ADPI Pro Tips
- Work with a reputable lender. When considering a VA cash-out refinance, it’s important to work with a lender you trust. Look for a lender with a good reputation, solid customer reviews, and a history of working with VA loans.
- Request to move the loan start date. In general, there is a 30-day window from approval to fist payment, however, some lenders may delay the first payment up to 60 days. Be sure to ask if there is any space to slide the first payment to the right and save two months of a mortgage payment.
This blog was written in collaboration with our absolutely amazing DoD SkillBridge employee: Seneca
