Written by Isaac F. Davis

The most frequently asked questions regarding how to use VA-backed mortgage loans for debt consolidation can be answered right here.  Many VA borrowers want to know how they can optimize their VA home loan benefits to pay off debts and lower monthly bills.  Many wonder if they must have a VA loan already to get a VA refinance loan.  And, many wonder what percentage of their equity can be accessed for cash to pay down debts.  Finally, there is a lot of buzz about the VA streamline refinance program.  Are there really advantages with the VA streamline program over regular VA refinance loans when it comes to qualifying, processing time and lower fees? 

First, using the VA home loan benefit to pay down debts can be a good way to lower overall monthly bills.  In order to do this, a VA borrower will need equity in his or her home.  Qualified VA-eligible borrowers can turn equity into cash with a VA cash-out refinance. Basically, the old mortgage is replaced with a new mortgage with a higher balance.  The cash they receive from refinancing their mortgage can, in reality, be used for whatever the borrower wants – even home improvements or family vacations.  Consolidating bills, paying off credit cards, repaying car loans and other debts can effectively reduce a veteran’s overall monthly expenses. 

It’s no secret, credit card interest rates and other short-term interest rates can be obscenely high.  Mortgage rates are almost always lower than credit card rates.  By using cash out of a VA refinance mortgage to pay off short-term debts, a VA borrower is essentially repaying the short-term debts over a longer period of time at a lower interest rate.  This practice obviously reduces monthly payments and consolidates bills to just one monthly payment.  An added perk is that interest on a mortgage loan is typically tax deductible, whereas credit card and auto loan interest is not. 

In order to get a VA cash-out refinance loan, some believe that they need to start with a VA loan.  The fact is, it is not necessary to already have a VA home loan to use the cash-out refinance program.  One simply needs to be VA eligible under the U.S. Department of Veterans Affairs guidelines.  Qualified veterans, active duty military servicepersons, and certain surviving spouses can use VA refinance loans.

One VA refinance program that does require an existing VA loan is the VA Streamline Program.  A VA streamline loan is used to refinance an existing VA loan for a lower interest rate and/or lower monthly payment with little or no money out of pocket. VA streamlines have a low VA funding fee of just one-half percent.  This fee as well as closing costs can usually be included in the loan.

Military borrowers with conventional or subprime loans have often used VA streamlines for this purpose.  If a VA borrower doesn’t need cash out and simply wants a lower monthly mortgage payment with a lower interest rate, or a shorter loan term or both, a VA streamline may be the way to go. 

The VA streamline refinance loan usually requires no credit and income qualifying, often requires no appraisal and may require less documentation than other home loan refinance programs.  VA-approved lenders typically look at mortgage payment history when considering a VA borrower for a VA streamline refinance loan. If a VA borrower has an existing VA loan with a rate of, say, six percent, it may be smart to look into a VA streamline refinance loan to reduce the interest rate on that loan more quickly and easily than with other types of mortgage programs.  VA streamline is also known as VA to VA Interest Rate Reduction Refinance or VA to VA IRRRL.

Whether it’s a VA to VA IRRRL or a VA cash-out refinance, using the government-backed security of the VA home loan program can be an effective way to get monthly finances in order.  Determining which program to use depends on a VA borrower’s circumstances.

If a VA-eligible borrower has a VA loan already and simply wants to refinance the existing balance at a lower interest rate, then a VA streamline refinance is probably the right way to go.  But, if the VA borrower has built up equity in his or her home, and cash is needed, then a cash-out refinance is most likely the right choice.  Many VA borrowers may want to access all of their home’s equity for cash, but realize most mortgage programs do not allow for 100% loan-to-value (LTV) borrowing.  The VA home loan program is different. 

VA purchase and refinance loans both allow for up to 100 percent LTV borrowing.  This means that a qualified VA borrower can access all of his or her home’s equity with a VA cash-out refinance loan.  But, it wasn’t always this way.

In 2008 the Veterans Benefits Improvement Act passed allowing 100 percent of a veteran’s equity to be used for VA cash-out refinance.  Before this legislation, the LTV limit for VA refinance loans was 90 percent.  While the VA refinance LTV went up, other loan programs like FHA and conventional have seen a reduction in the percentage of home equity a borrower can use for a cash-out refinance. 

The fact that VA-eligible borrowers are able to use the entire value of their homes to receive cash out for debt consolidation of high-interest debts or to pay for other expenses is unique to the VA loan program. Variables like appraised value, the current mortgage balance, and whether the borrower wants to roll closing costs into the VA cash-out refinance loan can affect the total amount of cash a VA borrower can get out of his or her home’s equity.

Whether the goal is to consolidate debt, get cash out of a home’s equity, or simply to reduce your interest rate or the term of your loan, it’s a good idea for military members to explore the VA cash-out refinance loan or the VA streamline refinance programs.  For more information, ask an experienced VA mortgage professional.