What to Use Cash-Out For

What Can I use Cash Out on a Refinance For?

Cash Out Refi

There are a lot of things you can use cash out on a refinancing for. In this article we’ll talk about the restrictions the VA puts on what you use it for, restrictions the lender puts on what you can use it for, what some of the most common uses are, and some things to think about when you are considering getting a cash-out refinance. This article will be talking specifically about VA loans, but most of this information also applies to conventional and FHA loans as well.


Restrictions on What You Can Use Cash Out For

From the VA, there aren’t any restrictions on what a borrower can use their cash out to do. The only thing the VA Lender’s Handbook says is that the borrower can get cash out “for any purpose approved by the lender”. The lender is definitely going to ask what you want the cash out for, but for the most part as long as you’re making a semi-responsible decision, the lender is going to be willing to dole out the cash. Why? Because your home is still securing the loan, and by taking cash out on your equity in the home, you’re both reducing the amount that will end up in your pocket when you sell the house and increasing the amount of principal you’re paying interest on. In addition to that, the lender is also getting paid thousands of dollars in closing costs. There may be some cases where a lender refuses a cash-out refinance based on what the borrower wants the money for, but they aren’t too common.


Common Uses for Cash Out

Most people use cash out on a refinancing to make major improvements to their home. These can be additions or extensive remodels, and are usually expensive enough that the borrowers can’t pay for it out-of-pocket and don’t want to put it on a credit card. If you’re wanting to make energy-efficient improvements to your home, you’ll want to look at the EEM (Energy Efficiency Mortgage) option first. You can get an EEM on a streamline refinance, which is must faster and cheaper than a cash-out, and get up to $6,000 (and more with special approval) to go towards those improvements. Other common uses for cash out is to consolidate debt. Why pay 15% APR on credit card debt when you can be paying 4.5% on it? Taking cash out on your home to pay off credit cards can be an awesome financial decision. Some people also take cash out to pay for additional education to improve their careers, or to pay for their children’s education.


Some Things to Remember

The reason you can get cash out on a refinancing is because you have equity in your home. As such, you can only get as much cash out as you have equity. Your loan amount can’t get higher than the value of the home. Also, refinancing costs a lot of money (as much as your original home purchase did unless you get a streamline), so you have to ask yourself if the $8k-$10k closing costs are worth the benefit you get from pulling out cash. Generally speaking, it’s not a good idea to get a cash-out refinance to purchase a new car. The reason why is because interest rates are usually lower on cars than on homes, so you’d actually be better off putting as little down on your car as possible and putting it into your house instead, at least in the long term. In the short term, you’d have to think about how big your monthly bills would get if you added a car payment. If you have a VA hybrid ARM that amortizes every year, you wouldn’t even have to refinance to put in that extra cash, and your monthly payment would drop at the next amortization, which would help equalize things a bit. Just some things to think about.



So, cash out can be used for whatever you want as long as the lender is OK with it, which they generally will be unless it’s completely irresponsible, and even then they might be fine. I’ve heard of people getting cash-out to go take an extended vacation in Europe. Be smart about refinancing, and see if there are any other options to fund your endeavor that might be better than getting cash out on your home. Contact us today for more details and to get started.


Handbook Sparknotes Chapter 6


VA Loan Refinancing Options – VA Lender’s Handbook Chapter 6

VA Lender Handbook Chapter 6

This article is a summary of Chapter 6 of the VA Lender’s Handbook. We’ll try to hit on the important things that the chapter covers here, but Chapter 6 is a particularly valuable piece of the Handbook and has a lot of really good information on refinancing in the VA loan program. Anyone looking to refinance a VA loan really should read the entire chapter, which you can find here. You can also check out our articles on Chapter 6 of the Handbook if you are looking for a simpler explanation of what the Handbook is talking about. Chapter 6 of the Handbook is all about the different refinancing options that the VA loan program has within it: the Interest Rate Reduction Refinance Loan and the Cash-out refinance.


The Interest Rate Reduction Refinance Loan

This refinancing option, also known as the IRRRL, is definitely the option to choose if you can. In order to use it, however, you need to already have a VA loan and be refinancing into another VA loan, and you cannot use this option to get cash out on your refinance. The IRRRL is a great option because it’s streamlined, meaning that “Generally, no appraisal, credit information or underwriting is required on an IRRRL, and any lender may close an IRRRL automatically.” IRRRLs also have a requirement that the interest rate decrease, with only a few exceptions. In addition to that, the monthly payment must decrease unless the loan term is shorter or an EEM is included on the loan. An EEM is an Energy Efficiency Mortgage, which you can add on to your IRRRL to pay for improvements to your home that will lower your utility bills. Before you get too crazy adding stuff to your IRRRL, you should know that if you add an EEM, finance your closing costs as part of the loan, and shorten your loan term, your monthly payment will probably rise significantly, and if it rises more than 20%, you will need to undergo some form of underwriting to make sure that you can afford the increased monthly payment. While even in this case an IRRRL is a better option than a cash-out refinance, it does make the IRRRL a bit less of a benefit.


Other benefits of the IRRRL include the ability to roll all of your closing costs into the loan, a significantly reduced VA Funding Fee, and the ability to complete the refinance very quickly.

The Cash-Out Refinance

Cash Out RefinanceCash-Out refinance is somewhat of a blanket term that covers any type of normal refinance (not a streamline). In other words, you may actually be putting cash into the mortgage, but it would still be called a cash-out refinance. A VA cash-out refinance is going to be the option you’ll want if you are refinancing from a conventional or FHA to a VA loan, or if you are wanting to take advantage of the equity you have in your home for another purpose. If neither of those two situations applies, then you’ll be better off with an IRRRL. A significant difference between the cash-out refinance and the IRRRL is that if you use the cash-out refinance you must certify that you intend to personally occupy the residence as your home after the refinance, while on the IRRRL you simply need to certify that you occupied the residence at some time in the past. This difference in occupancy requirements allows those who needed to move for one reason or another (like PCS orders), to keep their current home and still use VA loan benefits to purchase another home in their new assignment.


Comparing the Two

We’ve already talked a little bit about how the two compare and use cases for each one, but overall if you don’t need cash out and you already have a VA loan, you should at least try to get an IRRRL before going for a cash-out. IRRRLs can sometimes be difficult to get if interest rates have risen and you are not able to find a lender that will give you a lower interest rate than the one you currently have, and in those cases, a cash-out refinance will be a better option for you. All in all, it depends completely on your situation because one option is suited to certain circumstances and the other option is suited to other circumstances.


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