Many people spend years paying off their mortgages, and along the way, they accumulate thousands of dollars in equity from their properties. For many Americans, this home equity is their biggest asset; many people count on this source of funding during an emergency or to make a large purchase such as financing a college education. Tapping your home equity, however, can be more complicated than simply applying for a credit card or auto loan. This is particularly true if you have a VA loan, due to the restrictions that have been placed on this type of lending.
The biggest advantage to a VA cash out the loan is the ability to purchase a house without a down payment. While this can be a huge benefit to people who are just starting out their financial lives, it also means that it can take years for a consumer to be in the position where they can take equity out of the home.
With a conventional loan, home equity can be converted into cash simply by refinancing the home at the amount of the cash needed plus the remaining balance on the loan. In many cases, fees are a set dollar amount and can be added to the overall loan amount if necessary. For a VA cash-out refinance loan, however, taking out equity needs to be done while considering the funding fee.
The VA funding fee is a percentage of the overall amount of the loan that can range between 1.25 and 3.3 percent. The exact amount is dependent on the total amount of equity that is being left in the property after the loan is issued. Pulling out all of the equity in a home generates the highest fees while leaving ten percent or more in the property generates the lowest tier of fees.
Furthermore, VA cash-out refinances loans cannot be made for an amount higher than the appraised value of the home. That means that anyone planning to use a VA cash-out refirefinancesn to pull cash out of their home must consider the financing fee when computing how much money they can get out. For example, a person with $100,000 in equity on a $400,000 will need to subtract the funding fee being charged on the entire $400,000 loan from the $100,000 in equity that they want to take.
It should be noted that while this funding fee can seem high, VA cash-out refinances are one of the few available loans that will permit a borrower to take 100% of the equity out of a home. Most other types of loans will only allow up to 80 or 90 percent of the equity to be cashed out.
Because of the way the funding fee system works, it’s usually a good idea to inquire about how much taking out various amounts of equity will work. In some cases, it’s possible to pay less in fees simply by reducing the total amount of equity that is cashed out by a few hundred dollars. Carefully consider your goals before agreeing to take out equity from a home.
It’s also important to consider whether or not you want to wait for a home appraisal before going forward with the home equity loan. In volatile housing markets, the value of a property can change drastically over just a few years, opening the door for a consumer to take out significantly more money than he or she originally expected to qualify for. Also be aware that every property that is financed under a VA loan must meet certain conditions. Properties with significant damage or needed repairs are often seen as unable to be underwritten.
Once the appraisal and loan amount is determined, however, there isn’t much else to do. Unlike other types of refinance loans, a credit check will not affect the overall VA cash-out refinance rate. VA loans are backed by the federal government, making an individual credit check often unnecessary. There is a program called the Veteran’s United Lighthouse Program that is used to help veterans better their credit score in case the borrower has a low score and a credit check is required.
Refinancing with a VA loan can be a good option for anyone who needs to pull out cash and does not have at least 20% equity in their home. This is one of the rare types of refinancing that allows for 100% equity loans. This type of refinancing is also a good idea for people who have credit scores that would disqualify them from other types of loans. VA loans do not charge PMI or many of the other types of finance fees found with conventional lenders. However, potential borrowers need to consider the overall effect that the funding fee will have on their future financial plans. Finally, be aware that a VA loan refinance uses the VA certificate that each qualified borrower receives. That means that in order to qualify for a VA loan in the future, the current property willed to be sold or conventionally refinanced.