What Is a VA Cash Out Refinance and How Does It Work?

Discover if a VA Cash Out Refinance Is Right for You

A cash out refinance can be an affordable way to help you tap into your home equity. And if you're a veteran, active-duty service member, or eligible military spouse, you may qualify for a VA cash out refinance backed by the U.S. Department of Veterans Affairs (VA).

In this guide, we'll break down exactly what a VA cash out refinance is, how it works, who's eligible, and when it might support your financial goals as an existing homeowner.

What Is a VA Cash Out Refinance Loan?

A VA cash out refinance loan allows you to replace your current mortgage, whether it's a VA loan or conventional home loan, with a new and bigger loan backed by the VA.

Because it's a benefit of military service, a VA cash out refinance loan often allows you to borrow up to 90% of your home's value. This percentage is the loan-to-value ratio (LTV). A Conventional cash out refinance typically only allows you to borrow up to 80%.

VA cash out refinance loans don't require you to pay mortgage insurance like you often do with a Conventional cash out refinance. However, you'll probably have to pay a one-time VA funding fee.

How Does a VA Cash Out Refinance Work?

Because VA home loans are government-backed, they're often seen as less risky for lenders. This means lenders may be able to offer you lower rates and better terms.

You can use your cash out refinance funds for several purposes, which include:

• Making home improvements
• Paying off debt
• Paying for education or major expenses
• Refinancing an existing non-VA loan into a VA-backed loan

Whatever you decide to use the money for, understanding your options can help you get the most from your VA benefits to reach your financial goals.

Who's Eligible for a VA Cash Out Refi?

VA cash out refinances aren't just for veterans. As noted, others in the military community may qualify, including:

• Active-duty service members
• Members of the National Guard and Army Reserve
• Eligible surviving spouses

The following VA loan requirements are also important to be aware of:

• You'll need a VA Certificate of Eligibility (COE) based on your service or other affiliation with the military.
• You must meet the lender's credit and income requirements, which include having an acceptable debt-to-income ratio (DTI).
• The mortgage being refinanced must be for a home where you currently live.

If you're eligible, consider what a VA cash out refi loan would look like for you. Get prequalified or talk with one of our Loan Advisors.

VA Cash Out Refi Example

How much cash you may be able to get depends on your home's current value and your loan's current balance. It also depends on the maximum loan-to-value ratio (LTV). At Freedom Mortgage, we typically offer 90% maximum loan-to-value ratios on our VA cash out refinances. Here's an example of what this could look like:

Home value: $400,000
Current mortgage balance: $300,000
Sample maximum LTV: 0.9 or 90%
Maximum new mortgage balance: $360,000 ($400,000 x 0.9)
Maximum cash available: $60,000 ($360,000 - $300,000)

In this example, the homeowner can increase their VA mortgage balance to $360,000. This is equal to 90% of the home's current value. To get the homeowner's estimated $60,000 in available cash, subtract the current mortgage balance from the new maximum mortgage balance.

Keep in mind that a VA cash out refinance comes with closing costs you will need to pay or add to your loan amount. If you add closing costs to your loan amount, this can reduce the amount of cash you might receive.

The new monthly payment would depend on the refinance loan's rate, terms, and length. You can get an idea of how a VA cash out refinance can help you reach your financial goals by checking out our cash out refinance calculator.

VA Cash Out Refinancing Costs

While a VA cash out refinance can be a great way to borrow money, there are costs to consider. The cost of refinancing with a VA loan depends on several factors, including the loan amount, interest rate, fees, and more. Here are some associated costs to keep in mind:

VA Funding Fee

The VA funding fee is a one-time payment on VA-backed loans. The first time you use a VA cash out refinance, the current funding fee is 2.15% of the loan amount. After this first use, the current funding fee for additional cash out refinances is 3.3%.

Some disabled veterans and surviving spouses may be exempt from paying this funding fee. You can often roll the funding fee into your loan amount. You can also pay it in cash at closing.

Other Closing Costs

Closing costs for a VA cash out refi cover appraisal and other inspection fees, loan origination or lender fees, real estate taxes, state and local taxes, and homeowners insurance.

VA Cash Out Refinance Key Considerations

As with any big financial decision, you should consider the potential advantages and disadvantages of a VA cash out refinance. Here are some potential benefits:

• Interest rates can be lower than rates with Conventional cash out refinances.
• No mortgage insurance is required.
• You can access a percentage of your home's value, such as up to 90% with Freedom Mortgage
• You have unlimited flexibility in how you can use the money.

However, keep in mind:

• There's a VA funding fee.
• Only members of the military community are eligible.
• Not all lenders offer VA cash out loans.
• Your home must remain your primary residence.

How To Get a VA Cash Out Refinance: 5 Steps

If you meet eligibility requirements and think tapping into your home's equity with a VA cash out refinance is right for you, here's what the process usually looks like:

1. Research and choose a lender. Explore lenders who offer a VA cash out refinance and compare rates and terms. At Freedom Mortgage, our goal is to help you access the best financial solution with expert and knowledgeable support every step of the way. That's why we've been one of the nation's largest VA lenders for years, helping veterans and military homeowners enjoy their VA benefit.
2. Secure a Certificate of Eligibility (COE). The COE shows lenders you've met all the eligibility service requirements for a VA loan. There are a few ways to get a COE, including by mail and online, and you can always ask Freedom Mortgage to help. We'll take care of documenting your VA eligibility, allowing you to focus on more important things.
3. Get a home appraisal. Lenders will request a home appraisal to determine your home's value. This will determine how much you can borrow.
4. Apply for approval. Follow the necessary steps to complete your application, which will involve providing financial documentation of your income and assets.
5. Close on the loan and pay any fees. Following approval, you'll receive a closing date, which is when you'll sign the official mortgage loan paperwork and pay any of the associated closing costs (that aren't rolled into the loan) discussed above.

Final Thoughts on VA Cash Out Refinancing

A VA cash out refinance could help put you in a better financial position or finally make those home improvements you've been dreaming of. If you're ready to take the next step, fill out our web form and see if you qualify.

VA Cash Out Refinance FAQs

Still have questions about VA loan cash out refis? We've got you covered.

How Long Does a VA Cash Out Refinance Take?

In general, VA cash out loans can take about 45 days to close, but this timeline can be longer or shorter depending on a variety of factors.

What Credit Score Do You Need for a VA Cash Out Refinance?

The credit score required to qualify for a VA cash out refinance will vary. In general, the higher your credit score, the better your chances of loan approval. Freedom Mortgage can often help veterans and others eligible for VA-backed loans get a VA cash out refinance if they have a credit score of 550 or above.

What Are Some VA Cash Out Refi Alternatives?

There are a couple of potential ways to refinance your home loan, so you'll want to find the best fit for your situation. Alternatives to VA cash out refinance loans include:

• Home equity loan: Similar to a VA cash out refinance, a home equity loan provides you with a lump sum at closing. But a home equity loan doesn't replace your current mortgage like a cash out refinance—you'd have two payments. And home equity loans typically have higher interest rates than cash out refinances.
• Home equity line of credit (HELOC): A HELOC functions a lot like a credit card. You'll have a line of credit based on your home equity, but you only repay the amount you've actually borrowed (and the interest on that amount).

Is a VA Cash Out Refinance a Good Idea?

Ultimately, whether a VA cash out refinance makes sense for you will depend on your financial needs as well as the new loan terms.

If you have significant equity in your home and you know how you'll use the money, a VA cash out refinance could be your best choice.

The most important thing is to take all pros and cons of a VA cash out refinance into account to make the most informed decision that helps you reach your goals.