Exploring Home Equity Loan Options for Veterans

As a veteran myself, I understand the unique financial needs and goals of the veteran community. One topic that often comes up is how to access home equity through loans like cash-out refinances, home equity loans, and home equity lines of credit (HELOCs). In this comprehensive guide I’ll explain these home equity options in plain terms to help veterans make the most informed decision.

Before diving into specific loan products let’s first define home equity. This refers to the current financial stake you have in your home. Essentially it’s the appraised value of the house minus what you still owe on the mortgage.

For example, say you purchased a home for $200,000 and you still owe $150,000 on the mortgage. That means you have $50,000 in home equity ($200,000 – $150,000 = $50,000).

As you pay down the mortgage principal and as property values rise over time, your equity position grows. Veterans can leverage home equity to help reach financial goals through specialized loan products.

A VA Cash-Out Refinance

One way to access equity is through a VA cash-out refinance. This entails taking out a new mortgage that pays off your current loan balance. The “cash-out” portion refers to taking equity out as cash back at closing.

Here are some key features of a VA cash-out refinance:

• You can typically borrow up to 90% of the home’s value with this option. For example, if the home appraises for $250,000, you could potentially get a new loan for $225,000.

• The cash you take out is determined by subtracting the payoff amount on your current mortgage from the new loan amount. Using the example above, if you owed $150,000 still and took out a $225,000 refinance, you’d get $75,000 in cash back ($225,000 – $150,000 = $75,000).

• Closing costs can often be rolled into the new loan amount.

• You may need to meet credit score and underwriting requirements similar to a VA purchase loan.

• Interest rates are based on current market pricing since it is a new mortgage.

• VA guidelines include a “net tangible benefit test” to ensure the refinance makes financial sense.

• There are also seasoning requirements on when you can refinance an existing VA loan.

Overall, a VA cash-out refinance gives veterans a way to tap equity while still enjoying VA mortgage perks like no down payment and no private mortgage insurance requirements.

Home Equity Loans

Another option is a home equity loan. With this product, you take out a separate, fixed-rate loan that uses your equity as collateral. It does not replace your existing mortgage.

Some key points on home equity loans:

• You receive a lump sum of cash upfront, which you can use for any purpose.

• Having a separate loan means your original mortgage rate and term stay the same.

• Interest rates on home equity loans tend to be higher than mortgage rates.

• Minimum credit scores are usually 660-680.

• There are closing costs, but they may be less than a refinance.

• Payments are made separately from your regular mortgage payment.

For veterans who don’t want to refinance their mortgage but need a chunk of cash, a home equity loan can accomplish this goal. Just know it does create a second lien against the property.

Home Equity Lines of Credit (HELOCs)

The third option is a home equity line of credit, or HELOC. With this product:

• You have access to a line of credit based on your equity, similar to a credit card.

• There is no lump sum disbursement. You draw from the line of credit and pay interest only on what you actually use.

• Often variable rates apply, making long-term budgeting harder.

• There’s an initial “draw” period (often 10 years) where you can access funds, followed by a repayment period.

• During repayment, you can no longer draw and must pay down the balance with principal and interest.

• Total terms often range from 15-30 years.

HELOCs give flexible access to equity but do also create another lien. The variable rates mean your payment isn’t fixed either. For veterans seeking an ongoing line of credit, however, it can be an effective option.

Which Loan is Right for You?

When exploring home equity loans, first think about your goals and needs. Here are some questions to ask yourself:

• Do you need a lump sum of cash upfront for a specific purpose? Or will you need flexibility to draw funds over time?

• Do you hope to get a lower mortgage rate and term through a refinance?

• How do closing costs factor into your decision?

• Are you comfortable taking on another monthly payment?

• How do you feel about variable vs. fixed interest rates?

You should also consult with a lender to go over eligibility requirements for equity loans and see what you may qualify for based on your credit, income, and equity position.

While the VA does not offer specialized equity loan options, veterans can still utilize these loan products available through private lenders. The key is understanding how they work.

6 Benefits of Tapping Home Equity

Taking out a home equity loan is a big financial move. Before committing, it helps to review the potential benefits. Here are six common reasons veterans access equity:

1. Consolidate Higher-Interest Debt

The #1 reason I see veterans use equity loans is to consolidate higher rate debt like credit cards. By rolling this debt into a home equity product, they can potentially save money on interest.

2. Fund Home Improvements

Home renovations are another popular use of equity loan proceeds. Upgrades like a kitchen remodel, finished basement, or bathroom addition can improve quality of life while also boosting the home’s value.

3. Pay for College

College is expensive, so equity loans help some veteran families pay tuition while avoiding student loans or tapping retirement accounts.

4. Start a Business

For veterans hoping to launch a small business, equity loans provide startup capital to get things up and running. Just be sure to have a solid business plan first!

5. Manage Unexpected Expenses

If faced with an emergency home repair or medical situation, equity loans deliver funds quickly. This can be preferable to racking up costly credit card balances.

6. Buy Investment Property

Real estate investors may use equity loans to purchase rental properties that will cash flow and build additional wealth over time.

Again, while home equity can be put to good use, it’s critical to weigh the benefits against the drawbacks before moving forward.

5 Risks to Understand Before Taking Out an Equity Loan

Tapping equity does not come without risk. As a veteran myself, I want to provide full transparency on the potential downsides:

1. Reduced Home Equity

By design, equity loans decrease the stake you have left in your home after taking out cash. This means you have less of a cushion if home values decline.

2. Higher Monthly Payments

Whether it’s a new mortgage payment or second loan payment, equity loans increase housing costs. Make sure you budget for this carefully.

3. Later Payoff Date

With a cash-out refinance, your mortgage term resets, meaning it will take longer to pay off the loan. A home equity loan or HELOC also adds years.

4. Difficulty Getting Approved for Credit

Lenders may view multiple liens against your home as increased risk, making it harder to qualify for loans down the road.

5. Potential Foreclosure Trigger

If you fall behind on payments, having less equity makes foreclosure more likely. Missed payments on equity loans still impact credit as well.

As long as you go in with full awareness of the trade-offs, an equity loan can make sense. But it’s smart to partner with a lender that educates you on both the upsides and downsides.

7 Tips for Getting the Best Equity Loan Rates

As a veteran, here are my insider strategies for scoring the lowest rates when taking out an equity loan:

• Shop with multiple lenders to create competition. Avoid going with the first rate you see!

• Seek loan estimates before applying to compare. This is a soft credit check that won’t ding your score.

• Get pre-qualified first. This gives lenders confidence in your creditworthiness upfront.

• Know your credit scores and report. Errors or red flags will drive rates up, so resolve any issues ahead of time.

• Lower your debt-to-income ratio. Lenders offer better deals to borrowers using less of their income for debts.

• Bring decision-ready documentation like W2s, paystubs, and bank statements. This speeds approvals.

• Lock rates as soon as possible. Floating rates often rise over the loan process.

The bottom line is securing a competitive rate requires diligence and preparation. Don’t be afraid to