How Does a VA Cash-Out Refinance Work?
Are you a retired or active-duty military person who has built up some equity in your home? If yes, you have likely considered a VA cash-out refinance. With interest rates falling to record lows and housing prices going up, there might be no time like the present to cash in on your equity. Before you do, take some time to understand how it works and determine whether it is the best option for you.
What Is a VA Cash-Out Refinance?
As the name implies, this is a refinance loan backed by the U.S. Department of Veterans Affairs. According to the VA, it provides the opportunity to replace an old loan with a new one and withdraw equity from your home in the process.
You may be eligible for a VA refinance loan even if your original loan was not backed by the VA loan. Similarly, eligibility for your original VA loan does not guarantee eligibility for a new one. This might be the case if your relationship with the military has changed or you later received a dishonorable discharge.
How Does a VA-Backed Cash-Out Refinance Work?
The process is remarkably similar to getting an initial VA loan to buy a home. You start by looking for a lender that provides favorable terms. Sometimes, this is the same lender that provided you with the initial loan. However, you are more likely to get better terms from shopping around. Ideally, you should get at least three external quotes.
Be mindful that some lenders might require a hard credit score check to provide you with a quote. To get around this, many homebuyers work with brokers like National Home Loans. They apply once and we help find the best mortgage for their needs.
Once you determine which lender is right for you, you go through the lenderâs process of qualifying for a mortgage. These generally include the following steps:
- Apply for your Certificate of Eligibility as proof that the VA will back your loan.
- Provide information to your lender, such as W2s and the original loan document.
- Facilitate the appraisal of your property.
- Pay closing costs.
- Receive your cash.
How Can You Ensure You Get the Most Cash?
Some homeowners are so worried about the appraisal that they invest thousands of dollars into beautifying the property for the appraiser. Curb appeal means a lot to potential buyers, but appraisers have very specific factors they look for in a home.
Some lenders will let you know what some of those factors are ahead of time, so you can prepare. If you do not receive this information, focus on the basics and necessities. These might include the following:
- Powerwashing the home to get rid of dirt and grime
- Making all necessary repairs, such as fixing leaks
- Mowing the lawn
- Trimming trees that are close to the home
- Cleaning the pool if one is on the property
- Removing clutter from the home
Note that some lenders will allow you to borrow money equal to the full appraised value of the home, but this is not always the case. If this is important to you, be sure to confirm this at the start of the loan process. Get all responses in writing.
What Can I Do With the Money?
What you do with the money from a cash-out refinance is entirely up to you. That said, some uses are sure to create more promising returns than others. If you donât already have plans for the cash you withdraw, here are some possibilities to look into:
- Creating value-adding improvements to your property
- Purchasing an income property
- Paying off high-interest debt
- Investing in the stock market
- Saving for retirement
- Paying for a college degree
Finance gurus generally advise against using your cash to pay for new cars or expensive vacations. However, there are some justifiable reasons for either of these choices. For example, you might wish to upgrade from a gas guzzler to an electric vehicle. You might also need a vacation to clear your head and improve your mental health. Weigh the pros and cons carefully against your current financial stability before determining what you will do with the money.
At National Home Loans, we match military persons with San Diego VA loans that meet their needs. Find out what our current rates are for refinancing a California home.
Sources:
https://www.va.gov/housing-assistance/home-loans/loan-types/cash-out-loan/
