VA loans come with some very competitive interest rates. In addition, there is no monthly mortgage insurance premium, unlike other no/low down payment programs. FHA and USDA loans, the remaining two of the three government-backed programs, don’ require a hefty down payment but both have two different types of mortgage insurance. An upfront premium rolled into the loan amount and an annual premium paid in monthly installments. These premiums go to finance the loan guarantee lenders receive when issuing these loans. Conventional loans also can carry a monthly mortgage insurance payment if the loan balance exceeds 80% of the current appraised value of the property. VA loans also have a form of mortgage insurance called the Funding Fee, which is a one-time fee rolled into the final loan amount. Competitive mortgage rates and no monthly mortgage insurance makes for a very competitive loan.
Okay, now let’s say you’ve decided to refinance. You can refinance an existing loan into a VA loan even if the existing loan is not VA. You’ve gone over the numbers with your loan officer, compared rates and reviewed different loan options. You’ve made your choice and move forward with your application. But did you also want to pull some cash out while doing so? Given sufficient equity, you certainly can. Instead of just refinancing an existing loan, you can also tap into the remaining equity in your home. Pulling out cash during this transaction means tapping into the equity in your home at some very affordable rates.
It’s important to note however, that with a VA cash out loan, closing costs may not be rolled into the mortgage. Instead, they’ll need to be paid for out of pocket, by the lender or with an adjustment to the interest rate. A cash out refinance rate is going to be cheaper even then a home equity line of credit or other equity loan. An equity loan is a separate lien, subordinated to the first mortgage and due to its position will carry a slightly higher rate.
There really are not restrictions with regard to the use of the proceeds. With a home improvement loan for example, the proceeds must be used to finance both hard and soft costs associated with the improvement. A straight cash out loan doesn’t place any restrictions on what the funds may be used for. You can upgrade the kitchen or take the family to Disneyland. Or both. It doesn’t matter. All that matters is the funds are wired directly into your bank account.
One final word, while the VA doesn’t place restrictions on the loan amount compared to the current value of the property, individual lenders typically do. While the VA will guarantee a 100% cash out refinance, most lenders cap the loan amount to 90%. If you’ve been playing around with the idea of refinancing and you’re VA eligible, call your loan officer and discuss your options.
