Should You do a Cash Out Refinance?
When you notice the interest rates still available today and you haven’t refinanced, you’re probably thinking about it, especially if your interest rate is 5 percent or more. Yes, there are closing costs associated with a VA refinance just as there are closing costs for any mortgage and are part of the costs of the loan. You’ll have title insurance and an appraisal and a credit report among other charges and even though VA loans limit closing costs the veteran can pay, there are closing costs nonetheless.
You’ve also heard of a cash out refinance and wondered if VA offers a cash out refinance loan program and the answer is definitely “yes.” A cash out refinance is a new VA loan that pays off your existing VA mortgage, allows you to roll in eligible closing costs plus lets you pocket equity in the form of cash all at the same time. Not a bad deal if you can reduce your monthly payment and withdraw another $10,000 for you to use as you so choose. But there are some special considerations for you to review prior to committing to a VA cash out loan.
When not cashing out, most veterans refinance their existing VA mortgage with the VA “streamline” option, sometimes referred to as the Interest Rate Reduction Refinance Loan, or IRRRL. This special program requires very little documentation including no verification of income or employment, no appraisal and no credit score requirements.
However, once cash out is introduced, the loan no longer receives the streamline status and becomes a fully documented and verified loan in the same manner as the original VA loan was used to finance the purchase.
While the VA doesn’t set a maximum loan-to-value amount, most lenders do. VA lenders can limit the cash out refinance loan to 90 percent of the current market value of the property, lower in other areas.
If your main goal is to get additional cash, a cash out refinance is probably not your best option due to the closing costs involved and a simply home equity line of credit might be your best choice. However, if you do refinance and you can pull out cash, you do have that option as with any other mortgage program in the market today.