VA Home Equity Loan
A VA home equity loan is a type of loan in which the borrower uses the equity of his or her homes as collateral. The loan amount is determined by the value of the property, and the value of the property is determined by an appraiser from the lending institution. VA Home equity loans are often used to finance major expenses such as home repairs, medical bills, or college education. A VA home equity loan creates a lien against the borrower’s house and reduces actual home equity.
Most home equity loans require good to excellent credit history, reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types: closed end (traditionally just called a home equity loan (HEL)) and open end (home equity line of credit (HELOC)). Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage.
VA Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. VA Home equity loan can be used as a person’s main mortgage in place of a traditional mortgage. However, you cannot purchase a home using a VA home equity loan, you can only use a home equity loan to refinance. In the United States, in most cases it is possible to deduct home equity loan interest on your personal income taxes.
A VA home equity loan can be a great way for service-members to take cash out of their homes to pay down their debts. The recent financial crisis and collapse of the real estate market brought this type of lending to a halt, but there are signs that it’s picking up again for qualified homeowners. However, it’s not always the right answer to your money needs
VA Home Equity Loan Facts
Fixed rate and monthly payment amount. 1 to 20 year terms.
You can borrow up to 90% of the appraised value of your home, less any outstanding mortgages owed on the property Interest may be tax deductible, so check with a tax advisor.
Best rates for repayment by payroll deduction or automatic transfer from your checking account.
Funds disbursed in full when you get the loan.
Types of VA Home Equity Loans
VA Home Equity Loan (HEL):
If your original mortgage loan is backed by the VA, you may be able to obtain a conventional home equity loan through a bank or mortgage lender. Home equity loans are second mortgage loans that stand in second position to the current VA mortgage loan. The loan amount is paid out to you as a lump sum, and then you immediately begin paying off the loan based on the terms set by the lender. Generally, lenders charge slightly higher interest rates for these loans and might scrutinize your application more than the original mortgage application. A home equity loan usually has a fixed rate with a typical repayment term of 5-15 years. A home equity fixed rate loan affords homeowners a consistent payment and protection against rising interest rates, but may have higher rates overall
Home Equity Line of Credit (HELOC):
Essentially, HELOC loans work the same way as traditional VA home equity loans. However, instead of disbursing the funds in a lump sum, the lender sets up a credit account for you for a specific period of time called the draw period. During the draw period, you can use the funds like a credit card.
You can pay it off as you go, or make the minimum payments. After the draw period, you enter the repayment phase and pay off any remaining debt as agreed on. This form of an equity loan offers homeowners more flexibility to only use the money they need. A HELOC can have a lower interest rate than a fixed line, and you only draw as much as you need, but rates are unpredictable and may rise.
The VA doesn’t currently provide backing for traditional home equity loans. However, they offer cash-out refinance loans that are used to tap into your home’s equity value. This type of loan is not a second mortgage, it’s a new mortgage loan that pays off the existing loan and then pays out additional money to you in cash. With a VA cash-out refinance, you can go from a conventional mortgage loan into to a VA loan and take advantage of the many benefits. You’ll need to meet the same basic service eligibility and lending requirements to qualify for a cash-out refinance. Cash-Out Refinances is for homes that you use as a principal residence.
That owner can refinance in some cases up to 100 percent of the home’s appraised value plus allowable costs and fees. Homeowners who have sufficient equity in their homes may be able to take out cash beyond what they owe on their mortgage. refinance. Because the government guarantees these loans, they are generally cheaper than refinancing options available to civilians, but they still carry many of the same risks as home equity loans and lines of credit because you are taking on more debt and losing equity in your home. Depending on your needs, you may find that traditional home equity loans and lines of credit offer more cash or more flexibility. Credit and underwriting standards can vary by lender, and they’re typically more like a VA purchase loan when pursuing a Cash-Out.
Tips to Shop Your Home Equity Loan
Evaluate the impact of inflation, interest rates, and home value. Rising inflation, increasing interest rates and declining home values can impact a loan and make it less affordable. For example, with mortgage interest rates continuing to hover around historic lows, it is likely that rates will increase over the coming year, which will make a HELOC more expensive.
A weaker dollar can also make it more difficult to afford an additional mortgage note, especially a variable-rate mortgage. And finally, by removing equity from your home through a home equity loan or line of credit; you will be particularly vulnerable if home values continue to decline.
Evaluate the risks of secured versus unsecured debt. Home equity loans and lines of credit are secured debt; which means you use belongings like your house or your car as collateral. While this type of debt can be less expensive than high-interest; unsecured credit card debt, it carries certain long-term risks.
Quite simply, if you can’t make your payments, you could lose your house, car or other assets. If you are considering using a home equity loan or cash-out refinance to pay off credit card debt; understand that you are trading unsecured debt for secured debt. If you find yourself unable to make these new payments; you are at risk for losing your home. This could easily be the case if a variable rate HELOC begins to rise with interest rates; or you find yourself fighting back inflation by shorting your monthly payments. Be sure to consider all the options and understand all the implications before using a home equity product to reduce unsecured debt.
How to Qualify
To qualify you should first understand how much equity you have remaining in your home. Generally, banks will still require at least 20 percent equity in a home. If you bought your home without a down payment; which a VA loan allows you to do. Then it may take even longer to build up sufficient equity for a home equity loan.
You could also be denied if your credit score is too low. Potential borrowers should expect to meet strict minimum eligibility requirements that normally include a 720 credit score; and verified income for the past two years. If you think it’s the right step for you; talk to your accountant, financial advisor or a VA-approved lender to learn about your options.