If you have a VA loan and are wondering how to get equity out of your home, you’re in luck: you can use a home equity loan, home equity line of credit (HELOC) or VA cash-out refinance. All of these options will put cash in your pocket that you can use for anything you choose.
There’s no such thing as an official VA home equity loan, though. The U.S. Department of Veterans Affairs (VA) backs cash-out refinances, but not other home equity products.
As a veteran myself, I understand the unique financial situations we face. That’s why I wanted to provide an in-depth look at how veterans can use home equity loans and lines of credit. With the right information, you can leverage your hard-earned home equity to improve your finances.
What is Home Equity?
Let’s start with the basics Home equity is the current value of your home minus what you still owe on your mortgage For example
- Your home is worth $300,000
- You owe $180,000 on your mortgage
- So your home equity is $300,000 – $180,000 = $120,000
As you pay down your mortgage and as home values rise, your equity builds. You’ve earned it through your monthly payments and responsible homeownership.
Home equity gives you financial flexibility since you can borrow against it if needed. But make sure you understand all your options before moving forward.
Veterans Home Equity Loan vs VA Cash-Out Refinance
There are two main ways for veterans to tap home equity:
Home Equity Loan: This is a separate loan using your home as collateral. It does not impact your current VA mortgage.
VA Cash-Out Refinance: This pays off your current VA loan and replaces it with a new, larger mortgage. You get the difference in cash.
Let’s compare the two:
Home Equity Loan
- Interest rates are generally higher than mortgage rates
- Shorter repayment terms of 10 or 15 years
- Fixed interest rate and payment
- Quick access to lump sum
- Separate lien and second monthly payment
- Won’t change your VA mortgage rate/term
VA Cash-Out Refinance
- Typically lower interest rate than home equity loan
- Repayment term matches new mortgage term
- Fixed interest rate and payment
- Access lump sum after closing
- Replaces current VA mortgage
- Could lower monthly payment with lower rate
As you can see, each option has pros and cons. Refinancing could save money with a lower rate, but home equity loans avoid extending your mortgage term.
Home Equity Line of Credit (HELOC)
Another option is a home equity line of credit or HELOC. This works more like a credit card using your home as collateral. You’re approved for a set borrowing limit and interest rate.
Benefits of a HELOC include:
- Access funds as needed instead of lump sum
- Typically variable interest rate
- Interest-only payments during draw period
- Lower closing costs than refinance
Just keep in mind that HELOC rates are variable, meaning your monthly payment could go up. And you no longer have access to the funds once the draw period ends.
Tapping Home Equity as a Veteran
Now that you understand the basics, let’s discuss how veterans can leverage home equity loans, lines of credit, and refinancing.
Paying off Higher-Interest Debt
One smart use of home equity is to pay off more expensive debt like credit cards or personal loans. This can save a lot in interest costs over time.
Just make sure to avoid racking up new high-interest debt afterwards!
Funding Home Improvements
Home renovations are a great way to boost your property value while improving your quality of life. And home equity funds can supplement savings for larger projects.
A HELOC gives you flexibility to access funds over months instead of a lump sum. Just be sure home improvements align with your long-term plans.
Managing Medical Bills
Unfortunately, medical issues can surprise us. Whether ongoing care or an emergency expense, home equity could help cover costs that insurance doesn’t.
This ensures you aren’t forced to pause retirement savings or other financial goals to pay medical bills.
College Expenses
College tuition and fees are a huge burden for many families. Tapping your equity can help cover costs, but run the numbers carefully.
Ideally your child would utilize grants, scholarships, work-study programs, and federal student loans first.
Starting a Business
Entrepreneurship is the American dream. And funding a business launch with low-interest home equity could give you the boost you need.
Just be sure to create a detailed business plan and budget before moving forward. And have adequate savings to cover mortgage payments if the business struggles.
Weddings
Getting married is an exciting time in life! But weddings and receptions have soaring costs. If you have equity available, you could use funds to create the day of your dreams.
Or it could allow you to save aggressively for other financial goals while still hosting the event you want.
Retirement Income
In retirement, equity could provide funds to travel, purchase a vacation home, or cover emergency costs. Some even use reverse mortgages to convert equity into lifetime income.
Keep in mind that equity eventually has to be repaid, so it’s generally best as a supplemental income source.
Key Considerations
While home equity can help in many situations, please consider these key points:
- Shop mortgage rates to see if refinancing first makes sense
- Don’t tap so much equity that you lose a cushion for emergencies
- Avoid extending your mortgage term drastically with a refinance
- Have a clear plan for use of proceeds before moving forward
- Prioritize retirement saving and emergency funds before equity loans
Explore Your Home Equity Options
They can explain the implications specific to your situation. And provide personalized advice on the best approach to achieve your financial goals.
HELOC pros and cons
| Pros | Cons |
|---|---|
|
Long draw periods, up to 10 years or more. You only pay interest on the amount you spend. Lower upfront costs compared to home equity loans. |
Rising payments. Variable interest rates mean payments can increase significantly. Limited flexibility. Many HELOCs require an initial draw and minimum total draw amount. Rates tied to the market. Recent inflation and rising interest rates make a variable-rate loan more risky. |
As mentioned above, the VA doesn’t back second mortgages like home equity loans or HELOCs. However, there is an official, VA-backed program that can help you borrow from the equity in your property: the VA cash-out refinance loan.
A VA cash-out refinance allows you to take out a new VA loan for an amount larger than what you currently owe on your home. The new loan amount pays off your original mortgage, allows you to pocket the cash difference and is based on your home’s appraised value. The VA will guarantee cash-out refinance loans for up to a 90% LTV ratio.
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) is a revolving line of credit, similar to a credit card. Instead of receiving a lump sum of cash up front, HELOC borrowers can make multiple purchases — as many as they’d like — up to a credit limit. You can usually borrow up to 85% of your home equity, just like with a home equity loan.
You’ll have a specific window of time, called a draw period, in which to spend your money. This typically lasts anywhere from two to 20 years. You’ll then enter the repayment period, which often lasts 20 to 30 years.
HELOCs typically come with variable interest rates, but fixed-rate offerings may be available. The interest rate on variable-rate HELOCs will adjust with the broader market, but come with an interest rate ceiling that limits how high it can adjust.
HELOC Vs Home Equity Loan: Which is Better?
FAQ
Does the VA offer home equity loans?
What is the veteran cash out program?
What credit score do you need for a VA home equity loan?
How hard is it to get a VA cash-out refinance?
Can veterans get a home equity loan?
There is no true VA home equity loan option. Veterans who want to access their home equity for cash should consider a VA cash-out refinance loan. Veterans can still get home equity loans on their own, but this creates a second lien on the property and doesn’t take advantage of the VA loan’s unique benefits.
How do I get equity out of my home with a VA loan?
If you have a VA loan and are wondering how to get equity out of your home, you’re in luck: you can use a home equity loan, home equity line of credit (HELOC) or VA cash-out refinance. All of these options will put cash in your pocket that you can use for anything you choose.
Is a VA cash-out refinance a home equity loan?
VA cash-out refinance: While this is technically a refinance loan, and not a home equity loan, the VA cash-out refinance is a unique mortgage product available to VA borrowers who want to access home equity and still take advantage of the VA loan program’s numerous benefits. This loan would replace the existing mortgage with a new loan.
Does the VA offer a home equity line of credit?
The VA doesn’t offer a home equity line of credit – or HELOC. While traditional HELOCs can be a great option for long-term home renovations, eligible VA loan borrowers could tap into their home equity with a cash-out refinance to get a lump sum upfront.