VA Cash-Out Refinancing

A VA cash-out refinance will replace your current mortgage with a new VA home loan that has fresh terms (including the interest rate and payback timeline) and a higher balance. You’ll receive the cash amount you are borrowing against your equity at closing. Typically any associated refinancing costs will be rolled into the new loan balance. You’ll have one primary mortgage and can choose between a fixed-rate loan and an adjustable-rate loan.

If any of the following describes your condition of military service, you may be eligible for a VA loan:

• Completed 181 days of service during peacetime (active duty)
• Completed 90 days of service during wartime (active duty)
• Completed six years of service in the Reserves or National Guard
• Spouse passed away due to service-related complications

If you are unsure of your VA eligibility, you may request a Certificate of Eligibility from the U.S. Department of Veterans Affairs. Some veterans may also need to provide a valid DD-214 to lenders, which is your certificate of release or discharge from active duty.

Aside from proving your VA entitlement, as with any mortgage, you will need to satisfy all the requirements of underwriting, which include guidelines to be met on your debt-to-income ratio (DTI) and credit score. VA loan requirements tend to be less stringent than conventional loans, as they are guaranteed by the U.S. government, allowing lenders to provide more leniency and take on more risk compared to other loans.

A VA cash-out refinance replaces your existing primary mortgage with a new primary VA-backed mortgage with new terms and a higher loan balance. The difference between your original loan balance and the new balance, minus any closing costs, is then distributed to you as cash at closing. With this type of refinance you get to access cash from your home equity while keeping just one mortgage and one low monthly payment — and often at a fixed interest rate, or you can opt for an adjustable-rate mortgage, also available as a VA cash-out refinance option. VA adjustable-rate cash-out mortgages can be a great way to access cash from your equity with a comparatively low introductory interest rate. Note that your property type can affect eligibility with ARMs. Discover your best options with a Pennymac Loan Expert.

A home equity loan is a second home loan on top of your primary mortgage, and has a separate interest rate and payment schedule at a fixed interest rate. This type of loan is not a VA-backed mortgage. Someone who has an interest rate on their primary mortgage that is substantially lower than today’s current market rates may opt for a home equity loan if they want to leave their first mortgage unchanged. In this scenario, you would have two mortgage payments every month — one for your primary mortgage and one for your home equity loan.

Yes. You can refinance from any loan type — including FHA, USDA or conventional — into a VA-backed loan, as long as you meet the VA’s eligibility criteria. You may also get a cash-out refinance when you own your home outright with no existing mortgage.

Unlike a refinance that replaces your existing primary mortgage with a new primary mortgage, a HELOC (Home Equity Line of Credit) functions as a second mortgage on top of your primary mortgage. And unlike a home equity loan, a HELOC functions more like a credit card that you can draw from (over a certain period of time) with a variable interest rate dependent on market fluctuations, which can add risk to the loan in case interest rates rise after you’ve borrowed the cash.

A VA cash-out refinance offers the military community a flexible way to access their home equity for a variety of financial needs. Reasons to choose a VA cash-out refinance include:

• Tap into equity at low interest rates only accessible with a VA loan
• Get cash for home improvements, education or other major expenses
• Consolidate debt into one low manageable monthly payment
• Finance from 90-100% of your home’s appraised value (subject to VA and lender limits)
• Improve your credit score over time by reducing your credit utilization ratio
• Deduct interest on your mortgage (in some cases), unlike credit cards or personal loans*

*Consult a tax adviser for further information regarding the deductibility of interest and charges.

It’s important to weigh all of your financial goals with your existing options to decide on what type of mortgage works for you. A Pennymac Loan Expert can walk you through those options and help you figure out what you’d benefit from the most. Contact us today for guidance on your next steps.