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Do you have VA loan equity reserves? Let’s discuss how to build them up — and how to use them.
Published onJuly13,2021
Your VA loan equity reserve is the share of your property you actually own — or the home’s value minus your current VA loan balance.
Your home equity reserves are continually growing in two ways: each time you make a mortgage payment, and over time as your home’s value increases. Once you build those reserves high enough, you can tap into them for cash through a refinance, home equity loan, or home equity line of credit.
What are VA loan equity reserves?
The term “VA loan equity reserves” refers to how much equity you’ve built up in your property. It’s typically used by unscrupulous lenders in solicitations — often in the mail — to get borrowers to refinance their loans (even when they may not need to or benefit from it).
Despite this, home equity has value. For one, the more equity you have, the more you’ll stand to gain when you sell your property. Additionally, VA home equity can be used just as equity on any other loan can be — often via a cash-out refinance, home equity loan, or HELOC (home equity line of credit). These essentially turn your home equity into cash, so you can pay for home improvements or other expenses you might be facing.
What is home equity?
To really understand VA loan equity reserves, you have to understand what home equity is in the first place. In a nutshell, home equity is your stake in the home — or the portion of it you actually own and have paid off.
The best way to determine how much equity you have is to take its value (you can confirm this with your most recent appraisal) and deduct your current VA loan balance. The result is your home equity stake.
Reasons to use your home equity
Tapping into your home equity can often be a smart financial move — especially if you’re considering taking out a personal loan, credit card, or other high-interest product instead.
Some good ways to use your home equity include:
- Buy a new property: If you’re eyeing a second home or investment property, your home equity can help. Just tap your equity with a refinance or home equity loan, and then use the funds as the down payment on your new property.
- Cover emergency expenses: If you’re facing high medical bills or some other unexpected expense, tapping your home equity can be an affordable way to cover it.
- Make home improvements: Need to repair something on the house? Just want to renovate or update it? Leveraging your home equity can help you pay for those changes. They may even be tax-deductible if you use them solely to improve your property.
- Consolidate debts: Home equity products typically come with lower interest rates than other financial products. So if you’re dealing with high-interest credit card debts or loans, paying them off with a cash-out refinance or home equity loan can often save you lots in interest.
Keep in mind that tapping your home equity isn’t always the best move, so if you’re not sure how to handle an expense, debt, or home improvement project you’re considering, speak to a financial advisor before making any moves.
How to build home equity
There are several ways to build up your home equity — and some of them require no work at all.
Here are some proven strategies to increase your VA loan equity reserves:
- Make a large down payment
- Make your regularly scheduled monthly mortgage payments
- Pay more than the minimum each month
- Renovate your space (or add to it)
- Increase your curb appeal
Additionally, if your local market is hot and high demand drives up home values, this increases your equity, too. You’ll need to get a new appraisal to confirm its current value, though.
How to use home equity once you have it
Once you’ve built up some home equity on your VA-financed home, there are three ways you can tap it and turn it into cash: A home equity loan, a home equity line of credit (HELOC), or a cash-out refinance. Let’s look at all three in more depth.
Can you take out a home equity loan with an outstanding VA mortgage?
Yes, you can take out a home equity loan if you have an outstanding VA mortgage. The VA does not guarantee home equity loans or HELOCs, so your VA entitlement will not come into play here. Your eligibility for a home equity loan will depend on how much equity you have, your credit score, and various other financial factors.
What is a VA home equity loan?
Home equity loans allow you to turn your equity into a single lump-sum payment. They function much like your existing VA mortgage and require monthly payments over an extended period of time. These payments are made in addition to your current mortgage payment (so you’ll have two payments each month).
Unfortunately, there is no specific VA home equity loan. The VA only guarantees primary mortgages, not second mortgages — which home equity loans are considered. For this reason, you won’t need a COE or proof of military service to apply for one. Qualifying requirements will depend on your lender, equity amount, and more.
What is a VA home equity line of credit (HELOC)?
A home equity line of credit is another way to access your equity. With this option, a portion of your equity becomes a credit line, which you can withdraw from as needed over a certain period of time. It functions similarly to a credit card.
With most HELOCs, you’ll pay only interest for the first 10 years or so. At that point, your withdrawal period will end, and you’ll begin making larger monthly payments — in addition to your existing mortgage payments — until the loan is paid off.
As with home equity loans, the VA does not guarantee HELOCs. Eligibility will depend on your credit score, equity stake, and other financial factors.
What is a VA cash-out refinance?
A cash-out refinance is often the best way to leverage your home equity. This allows you to both replace your existing VA loan (and its rate and terms), while also turning your equity into cash.
The VA guarantees cash-out refinances, and using one can often lower your interest rate in the process. Even better? It leaves you just one single monthly payment (versus the two payments that HELOCs and home equity loans come with). To learn more, see our VA cash-out refinance guide now.
What’s the difference between a cash-out refinance vs home equity loan?
A cash-out refinance replaces your existing mortgage loan, while a home equity loan is a second loan in addition to your mortgage. Both come with a monthly payment, and both can have either a fixed or adjustable income rate.
Is it smart to access my home equity?
Your home equity can help you cover unexpected costs, consolidate debt, and achieve other financial goals, but it’s not always the right move. Always remember: A loan against your house puts it at risk of foreclosure. If you’re unsure you can handle the payments that a home equity loan, HELOC, or other equity product comes with, it’s likely not the best path forward. In this case, you might consider a credit card, personal loan, or other option that won’t use your home as collateral.
On the other hand, if you’re comfortable with your income and confident you can make the payments that your new loan will come with, then leveraging your home equity may very well be a great move. In fact, it may even save you money in the long run.
Talk to a lender
We know equity can be a confusing topic. If you’re curious how to best use yours for the financial goals you have in mind, get in touch with a VA loan expert today. We can help you determine the best path forward.
