If you've been paying on your mortgage for years (or decades), you may be tired of having the majority of your net worth tied up in your home. It can be tempting to seek a cash-out refinance to help pay off other bills or finance home improvements. However, for those whose loans are guaranteed by the Veterans Administration (VA), the refinancing process can be a bit different from that of conventional loans. Read on to learn more about the va cash out refinance process and some situations in which this option may make sense for you.
Why is refinancing a VA loan different from other types of loans?
When you refinance your mortgage solely to reduce your interest rate, this is a fairly risk-free process for the lender, as long as your home isn't underwater. However, when you seek to cash out your home equity during a refinance, the lender must weigh the risk that your home could decline in value so that they may not be able to sell it for enough to cover the loan if you default. This may mean that borrowers who are in a volatile real estate market may be prevented from tapping their home equity.
However, those who have VA loans are able to borrow up to 100 percent of the value of their homes. This can allow you to fully take advantage of the existing equity in your home while still keeping a low interest rate.
Is a cash-out refinance a good financial decision?
While a VA cash-out refinance usually allows you to recoup more equity than other types of refinancing loans, that doesn't mean this type of loan is always a wise financial choice. If you feel compelled to cash out your home's equity to pay credit card bills incurred through overspending, you may want to address your underlying budget issues before tapping into one of your most important assets. And in some situations, filing for bankruptcy protection (which can allow you to keep your home while wiping out other debts) may be your best choice.
However, there are still some situations in which a cash-out refinance is a good idea. For example, if your local real estate market is booming and you're able to cash out enough equity to purchase a small rental or two, you may find that these rentals can produce enough income to help you pay the mortgage. A cash-out refinance can also help pay for home improvements that will further increase the value of your home upon resale.