A VA Cash-Out refinance is a popular option for homeowners who want to use their home equity for a variety of reasons, from funding home improvements to paying for college. Its also a great opportunity to consolidate credit cards and other high-interest debts under one umbrella at an affordable rate.
However, there are pros and cons of using a cash-out refinance to pay off debt. Lets take a look at how this works with a VA loan and explore some key things to consider before you start.
Debt consolidation can provide much-needed financial relief for veterans struggling with high-interest credit card, medical, or personal debt. By rolling multiple unsecured debts into one new loan with a lower interest rate, consolidation can reduce your monthly payments and help you pay off what you owe faster
For veterans and active-duty military with an existing VA home loan, a VA debt consolidation loan offers unique advantages over other consolidation options. Let’s take a closer look at how VA debt consolidation works, who qualifies the pros and cons, and alternative debt relief programs for veterans.
What is VA Debt Consolidation?
A VA debt consolidation loan allows you to refinance your current VA home loan for more than what you currently owe on your mortgage. The difference between your old loan balance and the new, higher loan amount is paid out to you in cash at closing. You can then use these funds to repay credit cards, medical bills, payday loans and other unsecured debt.
By rolling all your debts into one VA consolidation loan, you end up with a single monthly payment at a lower interest rate. This can significantly reduce your monthly bills and help you regain control of your finances.
VA debt consolidation loans are considered cash-out refinances because you are taking equity out of your home in the form of cash, You must have sufficient equity built up in your property to qualify
Who Qualifies for a VA Debt Consolidation Loan?
To be eligible for a VA cash-out consolidation loan, you must:
- Be an active-duty service member, veteran, or qualifying military spouse
- Have an existing VA home loan
- Have sufficient equity in your home
Your lender will look at your debt-to-income ratio, credit score, residual income, and loan-to-value ratio when determining if you qualify and how much cash you can take out.
VA guidelines allow more flexibility on these criteria compared to conventional loans. However, each lender sets their own requirements. Shop around with multiple lenders to find the best consolidation loan terms for your situation.
The Pros of VA Debt Consolidation
Lower Interest Rate
The main benefit of a VA consolidation loan is getting a lower interest rate, which reduces your monthly payments. VA home loans often have interest rates near or below market average.
For example, if you had $20,000 in credit card debt at 19% APR and consolidated it into a VA loan at 4% APR, you could save hundreds per month in interest charges.
Longer Repayment Term
VA mortgages come with longer repayment terms than other types of consolidation loans. You may be able to stretch your new consolidation loan out over 10, 15, 20, or even 30 years.
The longer timeline lowers your monthly payment. However, you will pay more interest over the full loan term.
Single Monthly Payment
Instead of tracking multiple bills, you’ll have one convenient mortgage payment each month. This simplified approach makes budgeting easier.
Flexible Qualifying Criteria
The VA has more relaxed underwriting standards on credit score, debt ratios, and down payment requirements compared to conventional loans. These flexible guidelines increase approval odds for veterans.
No Prepayment Penalties
If you come into extra cash, you can pay down your VA consolidation loan early without penalty. This allows you to pay off your debt faster and potentially save on interest.
VA Protections
VA loans come with borrower protections, like limits on late fees and foreclosure prevention assistance. The VA provides guarantees to lenders and can step in to help if you run into trouble repaying your consolidation loan.
The Cons of VA Debt Consolidation
Closing Costs
You’ll have to pay closing costs to process a VA cash-out refinance, including:
- Origination fees
- VA funding fee
- Appraisal fee
- Credit report fee
- Taxes, insurance, escrows
- Recording fees
- Title insurance
Closing costs typically range from 3% to 6% of the total loan amount. These fees are subtracted from the payout you receive at closing.
Interest Paid
Because VA mortgages come with longer repayment terms, you will pay significantly more interest over the full loan period compared to a shorter-term personal loan. Make sure to run the numbers to see if the interest savings outweigh the costs.
Loan-to-Value Limit
Cash-out refinances have loan-to-value (LTV) limits on how much equity you can pull out based on your home value. Generally, you can borrow up to 90% LTV on a VA refi, limiting how much cash you may get.
Risk of Foreclosure
As with any cash-out mortgage, consolidating unsecured debts into your VA home loan means risking foreclosure if you default. Missed payments could put your home on the line.
Prepayment Penalties
Some lenders may charge a penalty for paying off a VA consolidation loan early. Make sure to ask if any prepayment fees apply.
Credit Inquiries
Multiple hard credit inquiries from applying with different VA lenders can temporarily knock a few points off your credit score. Too many rate checks in a short period can damage your credit.
What Debts Can Be Consolidated with a VA Loan?
A VA cash-out refinance allows you to consolidate any type of unsecured debt, including:
- Credit card balances
- Medical bills
- Personal loans
- Payday loans
- Federal student loans
- Tax debts
Essentially, if it doesn’t require collateral (like an auto loan or mortgage), it can likely be rolled into a VA consolidation loan.
Debt with extremely high interest rates, like credit cards or payday loans, typically provide the most interest savings when consolidated into a lower rate VA loan.
VA Consolidation vs. Balance Transfer Credit Card
For some veterans, consolidating credit card debt with a 0% balance transfer card may be a better option than taking out a VA loan. Balance transfer cards offer 0% intro APR for 12-18 months on transferred balances.
This interest-free period allows you to pay down credit card balances rapidly without accumulating new interest charges. Just be sure to pay off the full balance before the intro rate expires. If you don’t, any remaining balance will accrue interest at an exceptionally high rate.
A VA consolidation loan offers more flexibility, allowing you to consolidate any type of unsecured debt beyond just credit cards. However, if you only need to consolidate credit card balances, a balance transfer card is worth considering first before taking out a VA home loan.
Alternatives to VA Debt Consolidation Loans
If you don’t currently have a VA mortgage, there are other debt relief options beyond VA consolidation loans:
Debt Management Plan
A Debt Management Plan (DMP) through a nonprofit credit counseling agency can lower interest rates and consolidate debt through one monthly payment. No new loan or collateral is required.
Debt Settlement
Debt settlement companies negotiate with your creditors to reduce what you owe. The accounts are considered settled for less than the full amount. This option will damage your credit score.
Personal Consolidation Loan
Banks, credit unions, and online lenders offer personal debt consolidation loans that roll multiple debts into one unsecured installment loan with fixed monthly payments. Qualifying can be challenging for those with poor credit.
HELOC
A Home Equity Line of Credit (HELOC) converts home equity into a revolving credit line. You can draw on the HELOC to repay debts, then make monthly interest-only payments on what you borrow.
401(k) Loan
You may be able to borrow against your 401(k) plan at low interest and pay it back through payroll deductions. 401(k) loans come with fewer fees than cashing out your retirement funds.
Military Aid Organizations
Reputable charities like Army Emergency Relief, Navy-Marine Corps Relief Society, and Air Force Aid Society provide interest-free loans or grants to active duty service members in need.
Bankruptcy
Filing Chapter 7 or Chapter 13 bankruptcy liquidates your debts or restructures payments through a court-ordered repayment plan. This option inflicts significant damage on your credit.
While less ideal than VA consolidation, these alternatives are open to veterans who don’t currently have a VA home loan.
Repaying a VA Debt Consolidation Loan
To get the full benefit from a VA consolidation loan, commit to paying off the new mortgage on time each month and as quickly as possible. Here are some tips:
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Make bi-weekly half payments instead of one monthly payment to reduce interest and pay off the loan faster.
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Split your direct deposit to automatically dedicate extra funds each pay period toward the principal.
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Round up each monthly payment to the nearest $50 or $100.
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Make an extra principal payment each year by setting aside your tax refund or bonus.
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Refinance again whenever you can get at least 0.5% lower interest rate.
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Avoid taking on new credit card or personal loan debts during repayment period.
The faster you repay your VA consolidation loan, the more money you save on interest charges. Developing healthy repayment habits
See if You Have Enough Equity Built Up
Equity is the difference between what you owe on your mortgage and what your home is currently worth. Lenders usually require you to maintain at least 20 percent equity in your home for a cash-out refinance, but the VA cash-out refinance allows you to borrow up to 100 percent of your home’s value.
Drawbacks of Consolidating Debt With a VA Cash-Out Refinance
Relying on a cash-out refinance for debt consolidation comes with some drawbacks, too. The biggest disadvantage, as weve discussed, is that youre tying more debt to your home. If you fall behind on payments, you could lose your home.
Additionally, your mortgage clock might be set back, depending on your new loan. When you extract the cash from the equity in your home, you are increasing the amount of time it’ll take you to pay off your mortgage.
Using a VA cash-out refinance to consolidate debt
FAQ
Can a VA loan be used to consolidate debt?
Does the VA have a debt relief program?
Can I get a VA loan to pay off credit card debt?
Can military members do debt consolidation?
What are the benefits of debt consolidation for veterans?
For veterans, the benefits of debt consolidation, such as lower interest rates and reduced monthly payments on credit card debt, can be a lifeline in dealing with financial problems. Visit Military & Veteran Debt Relief Options > Debt Consolidation For Veterans & The Military for more information.
Can you get a debt consolidation loan at VA financial?
Apply for a debt consolidation loan at VA Financial and you could receive up to $40,000 to repay high interest credit card debt or overdue long term loans. This personal loan combines all your debt into one easy to pay monthly payment, often with a lower interest rate.
Should service members get a debt consolidation loan?
A debt consolidation loan can be an attractive option for service members looking for financial relief, especially if they have a VA loan and equity in their home. However, service members should research and ponder these factors before making a decision.
Should you consider a military debt consolidation loan?
If you’re a servicemember considering debt consolidation, you should consider a Military Debt Consolidation Loan (MDCL), also known as a VA Consolidation Loan, as you have a big advantage over civilians if you have a VA loan on your home.