The VA home loan doesn’t require a down payment or monthly mortgage insurance. But the VA also offers refinancing, with two main VA refinance options. Each one suits a different situation.
In short:
- 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.
Apply for your VA refinance here.
VA Streamline (IRRRL)
The first type of VA refinance is the VA streamline. Its formal name is 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 generally does not require an appraisal, proof of assets, or income verification. As a result, it’s possible to refinance after a drop in home value or income since the purchase. The same is true for a borrower with little money in checking and savings accounts.
The loan also requires a reduced funding fee of 0.5% of the new loan amount, unless the borrower is exempt. The fee is much lower than what purchase or cash-out VA loans require.
Check your VA refinance eligibility here.
The borrower can’t receive cash at closing when using a VA streamline refinance. The loan amount can cover only the payoff of the existing VA loan, the closing costs, and the funding fee.
For instance, say someone owes $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.
Again, only borrowers who currently have a VA loan on their home can use this type of refinance. VA-eligible borrowers without a VA loan who want to refinance must use a VA cash-out loan.
VA Cash-out Refinance Options to Take Cash or Pay Off a Non-VA Loan
The VA cash-out loan has two sub-categories.
1) Refinancing to get cash at closing
2) Refinancing to pay off any loan that is not a VA loan
Unlike VA streamlines, VA cash-out loans require documentation. The borrower provides items such as pay stubs, W2s, an appraisal, and bank statements.
VA cash-out loans also require a higher funding fee than VA streamlines. The funding fee for a VA cash-out refinance is 2.15% of the loan amount for first use. For subsequent use, it is 3.3%.
A VA cash-out is not as convenient as a VA streamline. However, the borrower must take these extra steps to get its extra benefits.
Apply for your VA refinance here.
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 borrower then receives the difference, minus closing costs, at closing.
For example, a homeowner owes $100,000 on their current mortgage. 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 $20,000 to the borrower.
Although the loan balance and monthly payment increase, the borrower has an extra $20,000 in the bank. The borrower can use these funds 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 non-VA loan.
For example, a borrower purchased their home with a conventional loan, putting 20% down. Home values have since decreased, and the loan is now 98% of the home’s new value. As a result, the borrower likely can’t refinance with another conventional loan. The borrower can use a VA cash-out loan to refinance and pay off the existing conventional loan.
VA cash-out loans can be up to 100% of the home’s value, including the funding fee. So refinancing with a VA loan can be the only viable option.
If the home doesn’t appraise high enough though, the borrower might need to pay money to close. That can happen even though the loan’s name says “cash-out.”
For instance, a homeowner owes $100,000 on their existing non-VA loan. Closing costs are $3,000. Say the home appraises for $100,000 and the loan is 100% of the home’s value. In that case, the borrower would have to pay $3,000, plus any funding fee due, to close the loan.
A VA cash-out loan can pay off an existing non-VA loan and take cash out for any purpose at the same time.
Most often, borrowers use the VA cash-out loan for one purpose or the other. But VA allows a borrower to use both functions in the same loan. For example, a borrower can pay off an existing FHA loan and receive cash at closing with one VA cash-out loan.
Both VA refinance options, the VA streamline and the VA cash-out, are a great benefit for U.S. military Veterans.
Contact MyMortgageInsider if you have questions about a VA refinance.
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