What is a VA Cash-Out Refinance? (And Should You Do It?)

VA Cash-Out Refinance

Maybe you’ve heard about the VA IRRRL, the Interest Rate Reduction Refinance Loan, and its perks – no appraisal, minimal income verification, and the ability to lower your rate when interest rates are down. It’s an enticing option, no doubt. But what about pulling cash out of your home?

Yes, it’s possible with a VA loan. The process closely resembles a conventional loan cash-out refinance. You’ll need an appraisal, income verification, and good credit, unlike the IRRRL where these requirements are minimal.

One standout advantage of a VA Cash Out Refinance is the potential for more competitive interest rates. Why? Because the VA guarantees a portion of the loan, typically 25%. This guarantee allows lenders to offer better rates compared to conventional loans. Plus, there’s no need for private mortgage insurance even if you withdraw over 80% of the loan value.

Let’s dive into the numbers. With a VA Cash Out Refinance, you can potentially tap into up to 100% of your home’s appraised value. For instance, if your home appraises for $400,000 and your existing loan balance is $250,000, you could withdraw up to $400,000, but you’d need to settle the existing $250,000 balance, leaving you with around $150,000 in hand.

Now, here’s the catch. While there are no strict limitations on how you use this cash, not all uses are wise. Some promote using this money for vacations or home upgrades. Yet, financially, it might not be the smartest choice.

Smart Ways to Utilize a VA Cash Out Refinance

Ideally, a cash-out refinance should serve to consolidate high-interest debt. If you’re grappling with high-interest debts and combining them can reduce your overall payments, that’s a strategic use.

Another scenario is if you have a robust financial profile and plan to invest in assets like rental properties. 

Using the cash for personal indulgences might seem tempting, but financing vacations or non-essential expenses over a 30-year loan period might not be financially prudent. Essentially, you’re stretching out short-term enjoyment into a long-term financial commitment.

Proceed with Caution

Ultimately, while a VA Cash Out Refinance offers opportunities, it’s crucial to exercise caution. It’s a powerful financial tool, but it’s vital to use it wisely.

If you’re considering a cash-out refinance, ensure it aligns with your financial goals and seek advice if needed. Our intention is not to discourage, but to emphasize the importance of making informed, financially sound decisions.

If you have questions or need guidance, don’t hesitate to reach out.