If you have equity in your home (you owe less than the home’s value), you may be able to borrow that equity. The VA allows veterans to borrow up to 100% of the home’s value even with a cash-out refinance. Before you jump in head first, though, you should determine if it’s a good option right now.
Contrary to popular belief, taking cash out of your home’s equity isn’t always the right idea. It depends on the situation. Below we’ll discuss the most opportune times to refinance with the VA cash-out refinance.
Refinance if Interest Rates are Lower
VA loan interest rates tend to be on the low side. If you had a less than perfect credit score or a high debt ratio when you bought your home, you may have a higher interest rate than you wanted. If rates fell since you bought the home and you’ve improved your financial situation, you may be in good standing for a lower interest rate, even with taking cash out of the home’s equity.
If you can save money on your mortgage payment and get some cash in your hand, it may be worth it. Before you spend the cash, though, think of ways to use it wisely. Whether you reinvest it in your home or pay off high interest debt, use the money in a way that provides positive results.
Refinance if You Can Fix up Your Home
Many home improvement projects add value to your home. If you have equity in your home, you can use it to reinvest right back into your home with home improvements. Keep in mind that not all home improvements increase your home’s value. The top home improvements that increase a home’s value include:
- Minor kitchen remodels
- Minor bathroom remodels
- Adding a room
- Adding a deck
- Making energy efficient improvements
Other home improvements may have an effect on the home’s value, but you won’t see as high of a return as you would with the above renovations.
Refinance if You Can Pay off Credit Card Debt
If you are in over your head in credit card debt, you may use your home’s equity to pay it off in full. Be careful if you do this, though. First, make sure that you get a low enough interest rate to make it worth it. Compare the interest rate on the cash-out refinance to your credit card interest rates. If you are like most people and have a 19% or higher interest rate on your credit cards, you’ll save money by refinancing. If, however, you are lucky enough to have a low APR or even a 0% APR, you shouldn’t tie your debt into your home.
If you pay off credit card debt with your home’s equity, you need to exercise willpower. If you go and charge up the credit cards again, you are right back where you started, except with double the debt this time. Once you pay off the credit cards, lock them up so that you don’t use them unless you experience an extreme financial emergency where you have no other options.
Refinance if You Want to Buy Another Home
If you are thinking of buying an investment property or a second home and have equity in your primary home, put the equity to good use. Rather than borrowing a large amount of the cost of the home, use your current home’s equity for the down payment. This way the equity will grow in the new home, giving you an even better return on your investment.
Keep in mind that you can’t use VA financing for an investment or second home. You will need alternative financing options, such as a conventional or subprime loan. If you have great credit and debt ratios around 28% on the front-end and 36% on the back-end with the new mortgage included, you may qualify for conventional financing and get low interest rates and fees.
Use Caution When Taking a Cash-Out REfinance
Refinancing your VA loan to take cash out of the home can be risky, so exercise caution. Even though the VA allows you to borrow up to 100% of the home’s equity, try to keep it closer to 80% to give yourself a cushion. If home values fall, you won’t find yourself upside down on your loan because you used up your home’s equity. Also think about the debts you wrap into the equity (if you do). Credit card debt, for example, is unsecured, but if you tie it into your home’s equity, you put your home at risk should you default on the loan.
A VA cash-out refinance can be a good idea if you use it right. Look at all of your options and the pros/cons of refinancing right now. Think of the future and how the loan will affect your finances. If it all falls into place, you can get a great deal on your cash-out refinance.