What Can I use Cash Out on a Refinance For?
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.