Home repairs can increase the value of your home or just make it more livable. If you cannot afford the fees to make the necessary or desired changes, you may consider a cash out refinance. A VA cash out refinance for home repairs lets you tap into the equity in your home while basically reinvesting in your property. As with any other type of loan, there are pros and cons to taking the cash out of your home when you have a VA loan.
Benefits of a VA Cash Out Refinance for Home Repairs
First, we will look at the benefits of the VA cash out refinance for home repairs:
- A VA loan often has lower interest rates than a second mortgage or HELOC
- You may be able to deduct the interest you pay on the VA loan on your income taxes
- You have access to the money right away after the loan closing
- It provides a fixed interest rate
- You can increase the value of your home with the improvements
Disadvantages of a VA Cash Out Refinance for Home Repairs
Of course, there are downsides to the VA cash out refinance if you want to use it for home repairs, including:
- You have a higher LTV, which can be hard to make back, causing you to lose money if you sell too soon
- You have a higher risk of losing your home if you default
- You extend the loan term, negating any time you already put into your payments
- You have to pay closing costs
- You have to pay the funding fee again
The Types of Repairs
One way to gauge whether taking cash out of the equity of your home for repairs is smart is to determine the changes you plan to make. Not every repair or remodel you conduct will have a huge impact on the value of your home. Following are the most profitable changes:
- Kitchen – Any changes you make in the kitchen will likely have a great return on your investment. New appliances, flooring, countertops, or cabinets can all improve the value of your home.
- Bathroom – Just like the kitchen, almost any changes you make to the bathroom reflect in the value of your home. Adding granite flooring or countertops or updating the cabinets can be a profitable decision.
- Additions – Any new living space you add to your home often adds value if it is on the primary level of the home. If you go below grade, though, such as adding a bedroom in the basement, it will not have the same impact.
- Outdoor enhancements – Almost anything you do to the exterior of your home can have a positive impact on your home’s value. Patios, decks, upgraded landscaping, new roof, or new siding all greatly increase a home’s value.
- Energy efficient changes – If you want to enhance your home’s carbon footprint, you can use the money to purchase energy efficient utilities and appliances. Not only does this help your home’s value, but it may also provide you with help on your income taxes.
This is not an exhaustive list. There are other changes you can make that will have an impact on your home’s value, but these are the most common.
Figure in the Funding Fee
Something you need to keep in mind when considering a VA cash out refinance for home repairs is the amount you will pay in a funding fee. The funding fee could be as much as 3.3% of the loan amount. If you take out $200,000, this means your funding fee equals $6,600. It could take you a long time to make back the $6,600 depending on the types of repairs you make. The best way to determine if you should take the cash out is to value the repairs you plan to make. Think about what you will change and then talk to a professional appraiser or realtor to determine how much increase in value your home will experience. For example, if you make major kitchen renovations, chances are you will make the $6,600 back rather quickly. If, on the other hand, you are making small changes that don’t have a large impact on the value, taking the VA cash out refinance might not be the best choice.
Other Options Aside from a VA Cash Out Refinance for Home Repairs
If you don’t take the cash out of your home with the VA cash out refinance, you do have other options. They include:
- Home equity line of credit – These loans often have lower fees and great interest rates. They are still a mortgage, but they are not your first mortgage.
- Credit cards – If you have enough available credit and you can stay disciplined enough to pay the balance off, you can use credit cards to fund the cost of your repairs.
- Savings – If you are diligent enough to create a decent savings account, you can use your savings to pay for the home repairs/remodeling.
- Personal loan – Your local bank may be able to provide you with an affordable personal loan.
Before you decide if the VA cash out refinance for home repairs is the right choice, consider how long you will stay in the home. If you know you will move in the next couple of years, it might not make sense to pay the funding fee and closing costs. You can borrow the money from other sources as stated above and reap the benefits of a higher home value.
If, on the other hand, you plan to stay in your home for a while, the VA cash out refinance may be a viable option for you. VA loans have great interest rates and flexible guidelines. The cash out refinance can give you access to the equity in your home while helping you increase your home’s value. Really consider how long you plan to stay in the home and how long it will take you to pay off the funding fee to determine if this is the right choice for you.