The VA home loan is hands down the best purchase in today’s mortgage market. But the VA also provides refinancing options as well. The VA offers two main refinance types. Each one is suited for different situations.
- The VA Streamline Refinance is for homeowners with a VA loan currently.
- The VA Cash-out Refinance is for homeowners
- who currently do not have a VA loan
- and/or who want to convert their home equity into cash.
Read on for specifics of these VA refinance options.
VA Streamline (IRRRL)
The most popular type of VA refinance is the VA streamline. This product is also called the Interest Rate Reduction Refinancing Loan, or IRRRL.
This loan type is available to homeowners who currently have a VA home loan. The IRRRL refinance is simply a new VA loan to replace a current VA loan with a higher rate.
Homeowners find this type of loan helpful because the VA does not require an appraisal, proof of assets, or income verification. It’s possible to refinance even though a borrower has experienced a drop in home value, reduced income since their purchase, or has little money in their checking and saving accounts.
The loan also requires a reduced funding fee, usually 0.5% of the new loan amount. The fee is much lower than what purchase or cash-out VA loans require.
The borrower can’t receive cash at closing when using a VA streamline refinance. The loan amount must be no more than the amount it takes to pay off the existing debt and pay for closing costs.
For instance, if someone owns $100,000 and the new loan requires $3,000 in closing costs, their new VA streamline base loan amount can be no more than $103,000 not including the funding fee.
It’s worth mentioning again that this type of refinance can only be used by borrowers who currently have a VA loan on their home. For borrowers who are VA eligible and want to refinance, but don’t currently have a VA loan, they must use a VA cash-out loan.
VA Cash-out Refinance
The VA cash-out loan can be broken into two sub-categories.
1) Refinancing to get cash at closing
2) Refinancing to pay off any loan that is not a VA loan
VA cash-out loans are unlike VA streamlines, because they require the borrower to provide documentation such as pay stubs, W2s, an appraisal, and bank statements.
VA cash-out loans also require a higher funding fee than VA streamlines. The most common funding fee amount is 2.15% of the loan amount for active duty service members or Veterans with adequate service. This fee may be higher if the Veteran has used their VA home loan benefit before or is in the reserves or National Guard.
While a VA cash-out is not as convenient as a VA streamline, the necessary steps are required to take advantage of the extra benefits they provide.
Taking Cash at Closing of the Loan
The VA cash-out loan allows the borrower to receive cash for any purpose. Borrowers can open a loan with a bigger balance than they currently owe. The difference, minus closing costs, is then given to the borrower at closing.
For example, a homeowner owes $100,000 on their current mortgage, and they open up a new loan amount (not including the funding fee) of $123,000. Their new loan requires $3,000 in closing costs. So at closing, the escrow company cuts a check or wires money to the borrower in the amount of $20,000.
Although the loan balance and monthly payment increase, the borrower has an extra $20,000 in the bank. These funds can be used to pay off a car loan, make home renovations, or pay college tuition. There are no restrictions on what the borrower may do with this money.
Refinancing to Pay Off a Non-VA loan
The other purpose of a VA cash-out loan is to refinance and pay off any loan that is not a VA loan.
For example, a borrower purchased his home with a conventional loan, putting 20% down. Now home values have decreased and he or she can’t refinance with another conventional loan because his loan is 95% of the new value of the home. The borrower can use a VA cash-out loan to refinance and pay off his existing conventional loan.
VA cash-out loans can be up to 100% of the home’s value. So refinancing with a VA loan is often the only viable option.
If the home doesn’t appraise high enough though, it’s possible that the borrower would need to pay money to close, even though their loan is called a “cash-out” loan.
For instance, a homeowner owes $100,000 on their existing non-VA loan. Closing costs are $3,000. If the home appraises for $100,000 and the loan is 100% of the home’s value, the borrower would have to pay $3,000 to close the loan.
A borrower can use a VA cash-out loan to pay off an existing non-VA loan and at the same time take cash out for any purpose.
Most often, the VA cash-out loan is used for one purpose or the other. But VA allows for both functions to be utilized in the same loan. For example, a borrower can have an existing FHA loan, and simultaneously pay it off and receive cash at closing with a VA cash-out loan.
Whether VA streamline or VA cash-out, either type of VA refinance is a great benefit offered to U.S. military Veterans.
Contact MyMortgageInsider if you have questions about a VA refinance.
Tim Lucas (NMLS #118763), Editor
Tim Lucas is a mortgage writer with over 11 years of experience as a loan originator, processor, and team manager. Get a live rate quote for your home purchase or refinance at MyMortgageInsider. Visit Tim on Google+, Twitter, and Facebook.