Veterans Affairs (VA) Cash Out Refinance vs. Home Equity Line of Credit (HELOC): What Veterans Should Consider

Many veterans who are considering leveraging their home equity to finance certain goals are likely weighing a few options. Two common options for eligible veterans include the Veterans Affairs (VA) cash-out refinance and the home equity line of credit (HELOC).  

Although both of these loans allow borrowers to tap into their home equity, they accomplish that in different ways, with different terms, and with different requirements. In this article, we will explain these two loan options, how they compare to each other, and things to consider when choosing between the two.

What is a VA Cash-Out Refinance?

When an eligible veteran, active-duty service member, or surviving spouse takes out a VA cash-out refinance, they replace their current mortgage with a larger one. The cash they receive in the process is then used to pay off the original loan, leaving the borrower with the difference to spend as they’d like.  

However, in doing this, monthly payments could potentially increase, the new loan could cost you more in interest, and your loan term will likely be longer. Generally, borrowers would seek out a VA cash-out refinance to cover a large expense or refinance a non-VA loan into a VA loan.

Types of VA-Cash Out Refinances

There are two types of VA cash-out refinances: 

• Type I. When the new loan amount (including the financed VA funding fee) does not exceed the payoff amount for existing loan, that would be a Type I VA cash-out refinance. These typically have more stringent eligibility requirements.  

Despite being designated as a VA cash-out refinance, the borrower in this case would not take out cash. However, they would have to be able to recoup the costs and fees of the new loan within 36 months of closing.  

• Type II. This version is when the new loan amount is greater than the pay off amount of the existing loan. When you think of a VA cash-out refinance, you may likely be thinking of this version.  

VA-Cash Out Refinance Requirements

Similar to a standard VA loan, VA cash-out refinance borrowers would need to meet both the VA’s and their lender’s eligibility requirements. The VA requires that borrowers get an appraisal and that they must be: 

• Qualified for a VA Certificate of Eligibility (COE) 

• Able to meet VA standards for credit, income, and other factors 

• Live in the home you are refinancing 

Your lender is also likely to ask for documents to assess your financial situation. Things like W-2 forms, income tax returns, recent paystubs, and other information are commonly requested. Requirements around credit scores, debt-income ratios, and other factors may vary from lender to lender.  

Further, the loan-to-value for the VA cash-out refinance, which includes the financed VA funding fee, cannot be greater than 100%. Of course, borrowers must also have home equity to be eligible for this loan. There are also seasoning requirements, specifically: 

• The first monthly payment of the original loan must have been made 210 days or more before the closing of the VA cash-out refinance loan.  

• Six monthly payments must have been made on the original loan.  

• If the loan is being refinanced within one year from closing, lenders need to get a payment history, or ledger, from the loan servicer to document payments.  

For more information about the requirements for a VA cash-out refinance, be sure to talk to your lender and consult with the VA.

What is a HELOC?

A home equity line of credit, or HELOC, is typically, though not always, a second mortgage that allows borrowers to turn their home equity into a revolving line of credit, functionally similar to a credit card. Borrowers who use this loan type do risk losing their home if they default, so before pursuing this option, be sure you understand all the risks.  

At The Federal Savings Bank, a HELOC can potentially give borrowers access to funds between $50,000 and $500,000, depending on the amount for which they are qualified and what they would like to borrow.  

A HELOC is typically broken up into two phases: 

• Draw Period. During the draw period, borrowers can access the funds from their HELOC as needed. You do not need to borrow all of the money that you’re approved for. Throughout this period, you would pay interest only payments on the loan.  

• Repayment Period. After the draw period, you would no longer have access to the funds, and would begin repaying both principal and interest on the loan.  

Remember, because HELOCs are usually second mortgages, you would likely be repaying this loan at the same time as your first mortgage. Finally, a HELOC can have a fixed or adjustable interest rate.  

HELOC Requirements

Some of the HELOC requirements at The Federal Savings Bank include: 

• 45% maximum debt-to-income ratio 

• Minimum 680 FICO® credit score 

• Must have a certain amount of home equity (talk to your lender) 

• Must be a primary residence or 1-unit second home 

However, each lender is likely to have different requirements, so be sure to speak with them to see what would work for you.

VA Cash-Out Refinance vs HELOC

For eligible veterans who are choosing between these two options, it’s important to really think about your needs and your situation. Both loans can give those who qualify access to cash by leveraging home equity. Both are secured by your house, meaning they carry the risk of losing your home in foreclosure. But they differ in many ways.  

The most obvious difference between the two is that the VA cash-out refinance is a VA loan, so you must meet both the VA and lender requirements to get this loan. A HELOC can be available to any type of borrower who is able to meet their lender’s requirements.  

A VA cash-out could be useful if you: 

• Know what costs you’re trying to cover and want a lump sum to do so. 

• Have seen interest rates drop and could possibly lower yours in the new mortgage. 

• Want to maintain one monthly payment. 

A HELOC could be useful if you: 

• Don’t know exactly how much money you need, but you know you’ll need a good amount of it over a certain period.  

• Would benefit from the potentially smaller interest-only payments during the draw period and can handle two monthly loan payments over time.  

• Want to keep your existing mortgage.  

Of course, whether you go with a HELOC or VA cash-out refinance depends entirely on your specific needs and ability to handle each loan type.

Final Thoughts

At the end of the day, before choosing, it may be smart to carefully review your situation and speak with a lender about what might make the most sense. Both of these options are big decisions with serious risks, so you want to be confident that you move forward with an option that suits your needs and finances. Don’t rush into it!

DISCLAIMER: Subject to credit approval. Terms and conditions may apply. Subject to VA eligibility requirements. Property insurance is required. A HELOC is a revolving line of credit secured by your home. Borrowers can draw upon the credit as needed during the Draw Period and are only required to pay interest on the amount borrowed. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation. Variable Rate HELOC Mortgage interest rates and monthly payments are subject to monthly adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.