Can I Refinance My VA Loan If I Have an Equity LOC

By Ciaran John

You can a refinance a Department of Veterans Affairs, or VA, secured loan even if you have a home equity line of credit, or HELOC, secured on the same property. The VA insures loans on behalf of lenders and offers two loan programs, either of which you can use to refinance your mortgage. However, you can only do a straight refinance if your HELOC lender agrees to subordinate your line of credit.

The VA allows you to use an Interest Rate Reduction Refinancing Loan, or IRRRL, to refinance your home. The loan involves minimal closing costs and you do not have to order an appraisal, but you can only use an IRRRL to payoff your existing VA loan. To get an IRRRL, the new loan must involve a reduction in your interest rate and payment, although you can also use an IRRRL to payoff an adjustable rate loan with a fixed rate loan even if that results in an increase in your payment.

When you borrow money against your home, your lenders place liens on your property and if you have multiple home loans then the liens apply in order of seniority. This means that the lender with the oldest lien has the first claim on the sale proceeds of your home if you go into foreclosure. If you payoff your first lien with an IRRRL, then your HELOC would move into the first lien position but the VA does not insure second lien loans. Therefore, you can only refinance with an IRRRL if your HELOC lender signs a subordination agreement and allows the IRRRL to move into first lien position. Your HELOC lender gains nothing from such a move so most lenders do not agree to sign subordination agreements unless you hold both the IRRRL and the HELOC with the same lender.

If your lender refuses to sign a subordination agreement then you can refinance your home with a cash out loan backed by the VA. You must use the cash proceeds from the loan to payoff your first mortgage and your HELOC.

The VA enables you to borrow up to 100 percent of the equity in your home with a cash out refinance. Aside from paying off the HELOC, you can also use some of the loan proceeds to consolidate other debts. You can also use a non-VA backed cash-out refinance loan to payoff your first and second liens but most lenders cap the loan-to-value on non-VA cash-out loans at 80 or 85 percent of the property value.

On a HELOC, you receive monthly bills and have to make interest only payments. HELOCs have variable rates, which means that your payment can rise significantly over time. If you payoff your HELOC with a VA loan, you move your variable rate to a fixed rate loan and your monthly payments cover the principal as well as interest. However, when you pay down your HELOC, you can use the line again as and when you need to. When you pay down your VA loan you build up equity in your home but you cannot draw the equity out again without applying for a new HELOC or cash out loan.

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