If you’re looking for a traditional home equity loan or line of credit through the VA, it unfortunately doesn’t exist. The VA loan program doesn’t include second mortgages.
But the VA home loan program offers the VA cash-out refinance, which can do some of the same things as a home equity loan.
Key Takeaways:
- Home equity is the part of the home’s value that’s already paid off
- Home equity loans harness this home equity to lower costs for new loans
- The VA Cash-Out Refinance can unlock equity, but it also refinances the entire loan
- Non-VA second mortgages leverage equity while leaving original VA loan in place
How to Access Equity with a VA Cash-Out Refinance
The Department of Veterans Affairs, which operates the VA home loan program for veterans, does not insure home equity loans or home equity lines of credit (HELOC). But the VA does offer another way to borrow against equity: the VA Cash-Out Refinance.
A Common VA Cash-Out Refinance Scenario
Let’s say you bought a $250,000 home 10 years ago. You’ve paid the mortgage down to $210,000. Meanwhile, the home has appreciated in value to $360,000.
Here’s the math: You own a $360,000 home and owe $210,000 on the mortgage. The difference between those two numbers is your home equity. In this example, the homeowner has built up $150,000 in equity.
A VA Cash-Out Refi potentially allows you to remove this $150,000 in equity while also refinancing the existing mortgage. You’d get a new $360,000 mortgage and use $210,000 of the funds to pay off the $210,000 still owed on the current mortgage. The remaining $150,000 is your cash back to take home, less closing costs and fees.
Pro Tip: Many lenders only allow you to take a loan up to 90% of your home’s current value. This would leave you with $114,000 instead of $150,000.
Then you’d start making payments on the new larger loan.
Pros and Cons of a VA Cash-Out Refinance
VA borrowers still have a VA loan when they use the cash-out feature. Here are some pros and cons:
Pros:
- Larger loan amounts: In line with the VA’s mission to increase borrowing power for qualifying veterans, the VA Cash-Out Refi lets homeowners borrow up to 100 percent of their home’s value, maximizing home equity. Most non-VA home equity lenders limit the loan-to-value to 80%.
- Borrower keeps one loan: A VA Cash-Out Refinance replaces the original mortgage, meaning the borrower access home equity but still makes only one mortgage payment.
- A mortgage overhaul: Starting over with a brand new mortgage creates an opportunity to lower the mortgage rate on the entire mortgage debt — or to save money by changing the loan’s term.
Cons:
- Borrower could lose a great rate: You take on today’s mortgage rates for the new loan. You can’t keep your existing rate if it’s lower. In this case, a second mortgage could be better than the VA Cash-Out Refi.
- Expensive upfront costs: Since it’s a brand-new primary mortgage, the VA Cash-Out will require full closing costs on a large loan amount.
- Longer terms cost more: VA homeowners who have already paid off most of their current loan would pay more interest on the current loan balance by stretching the debt across a fresh 30-year loan.
Who Should Use the VA Cash-Out Refinance?
The ideal VA Cash-Out Refinance borrower has a relatively new mortgage — meaning they haven’t already been paying the loan for many years. Preferably, they can also drop their rate while refinancing.
This loan can also refinance a non-VA loan. If a homeowner is paying FHA or conventional mortgage insurance, a VA cash-out loan can eliminate this cost.
Borrowers who don’t want to give up their current loan terms should use a home equity loan or home equity line of credit.
Using a Home Equity Loan to Access Equity
A home equity loan will leave a home’s current VA mortgage in place while adding a second mortgage. This second mortgage will not be a VA loan product since the VA doesn’t insure second mortgages, but it will work alongside the current VA loan.
A Common Home Equity Loan Scenario
Let’s revisit our example of the VA homeowner who bought a $250,000 home 10 years ago. The current mortgage balance is $210,000, and the current home value is $360,000, creating $150,000 in equity.
This homeowner wants to keep the existing VA loan in place because it has a lower rate compared to today’s rates. Plus, the homeowner understands amortization schedules and knows a big chunk of the existing loan’s lifetime interest has already been paid. Getting a second mortgage, a home equity loan, will allow the homeowner to keep the benefits of the primary loan in place.
The new home equity loan will resemble a personal loan but with a much-lower interest rate because the loan is secured by the home’s value. The homeowner in our example decides to borrow $50,000 at a fixed interest rate over a 10-year term.
What is the Monthly Payment on a $50,000 Home Equity Loan?
The monthly payment on a $50,000 home equity loan depends on the rate and term. For our sample borrower, who got a 10-year loan at 7 percent, the payment is $580 a month.
Here are some payments on the same $50,000 home equity loan at different rates and terms:
| Interest rate* | Payment with 10-year term | Payment with 15-year term |
| 7 percent | $580 | $450 |
| 7.5 percent | $594 | $463 |
| 8 percent | $607 | $478 |
*Rates and payments are for example purposes only. May not be available.
This new monthly payment, on the $50,000 home equity loan, must be paid in addition to the existing payment on the primary VA loan.
Pros and Cons of a Home Equity Loan
Home equity loans are precise. They borrow only from a home’s equity without directly impacting its primary mortgage. This precision has pros and cons for borrowers:
Pros:
- Shorter loan terms: A home equity loan’s 10- or 15-year term leaves less time for interest to build compared to refinancing into a 30-year loan
- VA loan holders keep their primary mortgage: If it has a historically low rate or other advantages, this is a big deal
- Relatively low interest rates: Compared to credit card or personal loan rates, home equity loans offer much lower interest rates
- Lower upfront costs: Smaller and simpler loans require lower closing costs compared to primary mortgages
Cons:
- New lien added to home: The home equity lender will place a second lien on your home, meaning two lenders could foreclose if you failed to keep up payments
- Second monthly payment: A second mortgage adds a second monthly payment to the monthly budget
- Lower loan amounts: Compared to VA Cash-Out Refinance lenders, home equity lenders allow homeowners to borrow against a smaller percentage of their equity. Usually, the combined mortgage debt can’t exceed 80 to 90 percent of the home’s value
Who Should Use a Home Equity Loan?
VA borrowers who want to keep their current mortgages in place — and also borrow against home equity — can accomplish this with a home equity loan.
Using a Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) offers a twist on the home equity loan. Rather than borrowing a lump sum of cash, a HELOC opens an equity-backed credit line. The homeowner can spend and replace funds from the credit line as needed similar to a credit card.
Related: HELOC Calculator
A Common HELOC Scenario
Let’s revisit our VA homeowner one more time, the one with $150,000 stored up in home equity. This homeowner needs to borrow from this equity but plans to use the cash gradually, to pay for an ongoing home renovation project.
This veteran opens a home equity line of credit of $60,000. For the first four months, as the borrower gets quotes from contractors, no money is drawn from the HELOC which means no payment will be due. The HELOC is idle.
Then, needing to pay $10,000 to cover plumbing and electrical costs, the homeowner draws the $10,000 from the HELOC. The HELOC now has a balance of $10,000 and a minimum payment due the following month.
You can see how this arrangement can save on interest charges. The HELOC allows the homeowner to pay interest on a smaller amount of money. The HELOC’s payment will vary from month to month as the interest rate, and the withdrawn amount of money, changes.
Meanwhile, the homeowner keeps making regular payments on the primary VA mortgage.
What is the Monthly Payment on a $50,000 HELOC?
HELOC payments depend on:
- The credit line’s interest rate, which varies with market conditions
- The amount of credit drawn at the time
- Whether the HELOC is in its draw period or its repayment period
For this example, we’ll say the borrower has withdrawn $50,000:
| Interest rate* | Draw period (interest only) Monthly payment | Repayment period (20-years) Monthly payment |
| 8 percent | $333 | $418 |
| 9 percent | $375 | $450 |
| 10 percent | $417 | $482 |
*Rates and payments are for example purposes only. May not be available.
During the HELOC’s draw period, which typically continues for the first 10 years, the homeowner can pay only interest on the amount borrowed. When the draw period ends, the balance converts to a home equity loan with fixed payments for a set period of time, often 20 years.
Pros and Cons of a HELOC
HELOCs have more moving parts than fixed home equity loans. The interest rates and payments can vary from month to month, but attentive VA borrowers can use HELOCs to save money.
Pros:
- Can save money on interest: Withdrawing funds gradually, rather than borrowing a lump sum of cash, can lower interest charges
- Can be used repeatedly: HELOCs can be used, paid back, and re-used during their initial draw periods
- Lower upfront costs: HELOCs often charge transaction fees and annual fees, but upfront costs are lower
Cons:
- Variable interest rate: Like a credit card, a HELOC is a revolving loan; its interest rate could increase with market conditions. (The rate could also go down)
- The second lien: Just like with a home equity loan, a HELOC requires a second lien in addition to the primary mortgage’s lien. This means the lender could foreclose if necessary
- Repetitive fees: Annual fees and transaction fees add to the ongoing costs of borrowing
Who Should Use a Home Equity Line of Credit?
VA borrowers who want a second mortgage that’s flexible should consider a HELOC. Someone who doesn’t want to think about mortgage rates and draw periods vs repayment periods should stick with a home equity loan.
Pros and Cons of Tapping into Home Equity With Any Program
Some ads from lenders equate home equity to cash that’s available no strings attached.
This isn’t true. In reality, turning home equity into cash would require selling the home. When lenders talk about tapping equity, they really mean taking a loan and paying interest.
These loans create pros and cons for the borrower. The pros and cons boil down to risk vs reward.
Con: The Risk of Tying up Equity
When you get a home equity loan, you give the lender ownership of your home equity. You still get to keep the home — so long as you keep making payments on the home equity loan. Failing to make payments could put the home in jeopardy.
Pro: The Reward of Low-Cost Borrowing
This isn’t all bad. By using your home equity as collateral, lenders can charge lower interest rates — much lower than credit cards and unsecured personal loans charge. Home equity loans save thousands of dollars, or more, in finance charges. And once you’ve paid off the loan, with interest, the equity is all yours again.
Reasons to Access Home Equity
Since they understand the risk-reward relationship that’s built into using home equity, the most savvy homeowners use home equity loans to build a more stable financial future, not to spend unnecessarily.
Smart reasons to access home equity
- To improve the home, strengthening the real estate investment
- To consolidate debilitating high-interest debt at a lower interest rate
- To invest in another piece of property
- To pay for other future-minded projects like college tuition
Not-so-smart reasons to access home equity
- To pay for a vacation
- To buy Christmas presents
- To invest in an unproven asset
- To buy a new car
It’s also smart to use the kind of home equity loan that best matches your needs. VA homeowners can use a VA Cash-Out Refinance or a non-VA second mortgage to harness the power of their equity.
What to Do Next
Whether it’s with a HELOC, a home equity loan, or a complete VA Cash-Out Refinance, the cost of tapping into home equity depends a lot on interest rates.
With rates coming down from their post-pandemic highs — and with home values still holding strong in many markets — more VA homeowners are leveraging their home equity as an asset.
Comparing rates from multiple lenders is the best way to find the most affordable way to use home equity.
