Home Equity Loans for Veterans

Are you a veteran that's been wondering about the best way to tap into your home's equity? A home equity loan may be the answer. It can help you get a lump sum that can be used for a variety of reasons from remodeling your home to buying a second house. But can you get one backed by the Department of Veterans Affairs (VA)? Read on to learn all you need to know, including:

• What are home equity loans?
• What are home equity lines of credit?
• Does the VA offer home equity loans or lines of credit?
• How VA cash out refinance loans work
• Can you take cash out with a VA Streamline Refinance?
• Home equity loan vs. HELOC vs. VA cash out refinance loans: Which is best for you?

What are home equity loans?

First things first, a home equity loan is a type of loan that enables you to borrow money based on your available home equity and creditworthiness. A lender will look at the difference between your outstanding mortgage balance and the value of your home to calculate your available equity. Then, you can borrow up to a certain amount of that equity, depending on the lender’s loan-to-value ratio guidelines.

Expert tip: Many lenders will let you borrow up to 85% of your home's value (which means they allow an 85% LTV ratio). So if you're home appraises for $400,000, you could borrow up to $340,000, including your current mortgage balance and your home equity loan amount.

A home equity loan is a second mortgage that's added on top of your current mortgage. If you get one, you will be responsible for two monthly mortgage payments. Further, it will be secured by your home as a second lien so if you default on your payments, your home could go into foreclosure. Once approved, the loan amount is typically wired to your bank account in a lump sum that you repay, plus any applicable interest or fees, over a set term.

You can find home equity loans from many mortgage lenders on the market such as banks and credit unions. It's wise to shop around and compare rates and terms before selecting one.

What is a home equity line of credit (HELOC)?

Similar to a home equity loan, a home equity line of credit (HELOC) lets you take out cash based on your available home equity and your creditworthiness. However, instead of receiving a lump sum all at once, a credit line is made available to you in the amount you're allowed to borrow — similar to how credit cards work. You can then use the credit line as needed and will only be charged for the amount you use.

HELOCs often have a draw period of about 10 years during which you can use the credit line, pay it back, and use it again. You typically only make interest payments or small minimum payments while the credit line is available. Once the draw period ends, however, you'll either need to pay off the balance in a balloon payment or you can convert it to a term loan that you repay over time. Your options will depend on the terms offered by the lender you choose. Like home equity loans, HELOCs are also offered by many mortgage lenders on the market today.

Does the VA offer home equity loans or lines of credit?

Unfortunately, the Department of Veterans Affairs (VA) does not offer a VA home equity loan or VA home equity line of credit (HELOCs). At SoCal VA Homes. we CAN offer you a conventional home equity loan or line of credit. The VA does offer a mortgage refinance option called a VA cash out refinance loan that lets you refinance your mortgage and cash out your equity. If you want a home equity loan or line of credit, you’ll have to opt for a non-VA lender.

What are VA cash out refinance loans?

The VA cash out refinance loan is a mortgage refinance loan that replaces your current mortgage with a new one. However, instead of just replacing it, the new loan is for a larger amount so you can gain access to a portion of your equity.

Note: Unlike a home equity loan that adds a second mortgage on top of your original mortgage and gives you two payments, a cash out refinance loan replaces your original mortgage so you'll only have one payment.

Example of a VA cash out refinance

For example, say that you owe $250,000 on your mortgage and your house gets appraised for $400,000. You would have $150,000 in equity. If you wanted to cash out $100,000, you could get a VA cash out refinance loan for $350,000.

In this case, $250,000 would be used to pay off your outstanding mortgage balance, while $100,000 would be available to you in cash. Many people use these loans to pay off high-interest debt, invest in home improvement projects, or pay for their child's college tuition.

Expert tip: If you take out a cash out refinance loan at 90% loan to value or less, you'll qualify for the lowest interest rates. However, you can take out up to 100% of your home's value with the VA 100 cash out refinance program but will have to pay higher interest rates.

Pros and cons of VA cash out refinances

VA-backed cash out refinance loans come with a few perks that set them apart from non-VA loan options.

• First, they don't require mortgage insurance.
• Second, you can refinance up to 100% of your home's value, which is not allowed with any other equity loans.
• Third, the loan you're refinancing doesn't have to be an existing VA loan — it can be a conventional loan, FHA loan, etc.
• Fourth, they often come with competitive interest rates.

However, like a regular VA mortgage, a cash out refinance loan does come with a VA funding fee which can range from 1.4% up to 3.6% of the loan amount. Additionally, they have closing costs like a regular mortgage.

VA funding fee exemptions

You may be exempt from the VA funding fee in certain situations, which can make a VA cash out refinance all the more enticing. Exemptions are given if you:

• Have a service-connected disability and are receiving VA compensation (or are eligible but are receiving active duty or retirement pay instead).
• Are an active-duty service member who's received a purple heart on or before your loan's closing date.
• Are a surviving spouse of a Veteran who is receiving Dependency and Indemnity Compensation (DIC) because their spouse died during their military service or from a service-connected disability (or was totally disabled).
• Are a service member with a proposed memorandum rating, issued before your loan closes, that says you're eligible for compensation due to a pre-discharge claim.

These are a few examples of situations where you'd be exempt from the funding fee so wouldn't have to worry about that additional cost. If you have any questions about getting an exemption, or a refund, call us today at 949-268-7742.

VA cash out refinance loan eligibility

To be eligible for a VA cash out refinance loan, you'll have to meet a few requirements, including:

• Qualifying for a certificate of eligibility (COE)
• Living in the home you refinance with the loan
• Getting a VA appraisal from a VA-approved licensed appraiser
• Meeting the VA's home loan eligibility standards
• Meeting your lender's income, credit score, and any other requirements

In short, the rules that apply to regular VA home loan will apply to these as well.

Can you take cash out with a VA Streamline Refinance?

The only VA loan option that allows you to cash out home equity is the cash out refinance program. The VA Streamline Refinance program (IRRRL), on the other hand, lets you easily refinance existing VA home loans in order to lower your payment amount, lower your interest rate, or switch from an adjustable rate to a fixed rate. An IRRRL doesn't let you get a new loan for more than you owe on your current loan.

Home equity loan vs. HELOC vs. VA cash out refinance: Which is best for you?

Now that you know the main options you have when you want to cash out your home equity, which one should you choose? Here's a closer look at the typical terms to consider for each.

Disclaimer: Rates and terms will vary from one lender to the next and change over time. These are taken from current offerings on the market. Be sure to check with lenders to get the specific terms that will be available to you.

Home equity loans

Secured term loans, backed by a portion of your home equity, that provide a lump sum up front that you repay over time.

• Terms: Up to 30 years
• Lien position: Second lien
• Payments: Results in two monthly payments
• Loan to value ratio allowed: Up to 85%
• Credit score: At least 680
• Fees: Closing costs average 2% to 6% of the loan amount
• Interest rates: Fixed, average 4.26% to 5.21% APR

Pros:

• Fixed interest rates won't increase over your term, making for predictable, fixed payments
• Interest payments are tax-deductible if you use the funds to make home improvements
• You can receive a lump sum of cash at once for large one-time expenses

Cons:

• Rates may start higher than HELOC rates
• Home is at risk of foreclosure if you fail to make the payments
• Have to pay closing costs on the loan
• Results in two mortgage payments
• Interest is charged on the full loan amount from the day you receive it
• The loan limit will be restricted by the lender's loan to value rules

Home equity line of credit (HELOC)

A secured credit line, backed by a portion of your home equity, that you can use for a set period and then must pay back.

• Terms: 10-year draw period, up to 30-year repayment period (varies by lender)
• Lien position: Second lien
• Payments: Results in two monthly payments
• Loan to value ratio allowed: Up to 85%
• Credit score: 700 or higher
• Fees: Varies. Some lenders don't charge any fees while others charge origination, underwriting, loan recording, annual, or other fees.
• Interest rates: Variable, average 4.28% to 6.95% APR

Pros:

• Tap into home equity as needed
• Only pay on amounts you withdraw
• Payments may be interest-only until the draw period ends
• Like credit cards, you can pay off balances and regain credit line during the draw period
• Interest payments may be tax-deductible if spent on home improvements

Cons:

• A variable rate can result in high payments over the life of the loan
• Fees can be expensive with some lenders
• Home can go into foreclosure if you default
• Some lenders only offer balloon payments when draw periods end
• You typically need good credit to get approved

VA Cash out refinance loan

A VA-backed mortgage refinance loan that replaces your existing mortgage with a larger one, enabling you to cash out your available equity.

• Terms: Up to 30 years
• Lien position: First lien
• Payments: Single payment
• Loan to value ratio allowed: Up to 100%
• Credit score: 580 to 620
• Fees: Closing costs and the VA funding fee
• Interest rates: 5.73% APR

Pros:

• Gain a large lump sum at one time
• Only have one monthly mortgage payment
• Borrow up to 100% of your home's value
• More lenient credit score requirements
• Interest may be tax-deductible if you use the funds on home improvements
• Lower interest rates than a conventional cash out refinance loan.
• No mortgage insurance is required
• Funding fee may be waived

Cons:

• These loans come with closing costs and the VA funding fee (unless you have an exclusion)
• You must be eligible according to the VA requirements
• There may be a waiting period if you recently took out a VA loan

Your home is at risk if you default on the payments

Find the right home equity loan solution for your needs

Ready to turn your home equity into cash? The right loan solution will depend on your situation. First, it's important to understand your options. Then consider the pros and cons to figure out which will best suit your situation.

It can help to talk with a few lenders and get quotes on what you can expect costwise. If you'd like help with a VA cash out refinance or a home equity loan, the team at SoCal VA Home Loans is standing by! We regularly help veterans to secure these loans and get the cash they need as quickly and easily as possible

Our courteous staff of military Veterans are delighted to discuss your home equity loan needs. Call 949-268-7742 today!