How Veterans Can Use Home Equity Loans to Their Advantage

Home equity loans allow homeowners to tap into the equity they’ve built up in their home to access cash. For veterans, home equity loans can be an affordable way to finance large purchases, consolidate debt, or cover unexpected expenses. However, not all home equity loans are created equal. It’s important for veterans to understand their options so they can make the best financial decision.

In this comprehensive guide, we’ll explain everything veterans need to know about home equity loans. We’ll cover:

• What is home equity and how do you calculate it?
• Home equity loan basics
• VA cash-out refinancing vs. home equity loans
• Pros and cons of home equity loans
• Alternative personal loan options
• Qualifying for a home equity loan as a veteran

What is Home Equity and How Do You Calculate It?

Before we dive into home equity loans, let’s quickly review what home equity is and how it builds up.

Your home equity is the current value of your home minus how much you still owe on your mortgage. As you pay down your mortgage loan over time, your equity stake in the home increases.

For example

• You purchased a home for $200,000 with a 20% down payment of $40,000.
• Your original mortgage amount was $160,000.
• A few years later, the home is now worth $250,000.
• You still owe $140,000 on the mortgage.
• So your home equity is $250,000 (current value) – $140,000 (mortgage amount) = $110,000.

As a rule of thumb, you can access up to 85% of your home’s value through a home equity loan. So in this example, you could qualify for around $92,500 in home equity loan financing.

Home Equity Loan Basics

A home equity loan is a type of second mortgage that allows you to borrow against the equity in your home. With a home equity loan:

• You receive the loan amount you qualify for upfront in a lump sum
• The loan has a fixed interest rate and fixed monthly payments
• The term is usually 10-30 years
• Your home serves as collateral on the loan

Since home equity loans are secured by your property, they typically have lower interest rates than other financing options like personal loans or credit cards. However, if you fail to repay the loan, the lender can foreclose on your home.

One of the nice things about a home equity loan is that you can use the funds for any purpose. Common uses include:

• Home improvements and renovations
• Debt consolidation
• College tuition
• Medical bills
• Major purchases like a car or boat
• Weddings and other life events

VA Cash-Out Refinancing vs. Home Equity Loans

Many veterans wonder if they should get a VA cash-out refinance or a home equity loan. Here’s an overview of how they compare:

VA Cash-Out Refinancing

With a VA cash-out refinance, you refinance your existing VA mortgage into a new, larger mortgage. The proceeds from the new loan pay off your current mortgage balance, and you get the difference in cash.

Pros

• Access to 90% loan-to-value ratio
• Fixed rates and payments
• Potentially lower rates than home equity loan
• Consolidate other debts into new loan

Cons

• Lengthy process like getting a new mortgage
• Closing costs similar to a new home purchase
• Loss of previous mortgage’s lower rate/payments
• Extends your loan repayment term

Home Equity Loans

Home equity loans create a second mortgage on your home. Your original VA loan stays intact.

Pros

• Access cash quickly with less paperwork
• Keep original VA loan as-is
• Fixed rates and set repayment timeline

Cons

• Limited to 85% loan-to-value ratio
• Higher interest rates than mortgages
• Closing costs around 2-5% of loan amount

As you can see, VA cash-out refinancing gives you more borrowing power and potentially better rates. But the tradeoff is higher upfront costs and a longer repayment timeline.

Pros and Cons of Home Equity Loans

Before deciding if a home equity loan is right for your situation, weigh the key pros and cons:

Pros

• Access significant cash (tens of thousands)
• Lower rates than other financing options
• Fixed monthly payments
• Can deduct interest on federal taxes

Cons

• Closing costs of 2-5%
• Used home as collateral
• Foreclosure risk if payments lapse
• Credit score requirements (650+ typically)

Home equity loans make sense for veterans who need or want extra cash and meet the qualification requirements. Just be sure you can manage the fixed monthly payments over the many years of repayment.

Alternative Personal Loan Options

What if you don’t want to use your home as collateral or can’t qualify for a home equity loan? Personal loans allow you to borrow smaller amounts without using your property as security.

Some top options for veterans include:

• VA Personal Loans: Offered by certain lenders and credit unions, these unsecured loans have flexible terms tailored to veterans.

• Payday Alternative Loans: Offered by credit unions, these small loans of $200-$1,000 help cover emergencies and avoid predatory payday loans.

• Balance Transfer Credit Cards: These cards allow you to transfer high-interest credit card balances to a new card with a 0% intro APR for 12-21 months.

• Peer-to-Peer Lending: Online sites like Upstart connect you with individual investors who fund personal loans of $1,000-$50,000.

• 401(k) Loans: If allowed by your plan, you can borrow up to 50% of your vested 401(k) balance up to $50,000 and repay it over 5 years.

Be sure to compare interest rates and fees to find the most affordable option for your borrowing needs.

Qualifying for a Home Equity Loan as a Veteran

As a veteran, how can you position yourself to qualify for a home equity loan? Here are some key tips:

• Shop lenders who specialize in VA loans – This ensures you get the best VA-specific financing options. Credit unions are also veteran-friendly.

• Look for “no closing costs” offers – This allows you to get the equity without high upfront fees.

• Have a credit score of at least 650 – The higher your score, the lower interest rate you can qualify for.

• Evaluate your debt-to-income ratio – Lenders look for a DTI of 50% or less. Pay down credit cards and other debts first if needed.

• Check your loan-to-value ratio – Make sure you have enough equity built up to qualify for the amount you need.

• Consider a co-signer – Adding a co-signer with good credit may help you get approved or improve the terms.

As you can see, home equity loans offer veterans a way to tap into their home equity to access cash for major expenses or projects. Just be sure to evaluate all your options thoroughly and understand the risks before moving forward. Reach out to lenders who specialize in VA loans to discuss what product suits your financial situation.