FHA Cash-Out Refinance Loans
What Is a Cash-Out Refinance Loan on Your Mortgage?
There are two FHA refinance programs available depending on your needs, but only one lets you get cash out of your home’s equity. With an FHA cash-out refinance loan, homeowners can refinance their mortgage with a loan that carries a larger balance than is currently owed on the house to provide the homeowner with excess funds. So, whether you need money to pay for college or get a new car, it might be worthwhile to consider an FHA cash-out refinance loan. It is also possible to transition from a conventional mortgage to an FHA cash-out refinance loan.
The second FHA refinancing loan option is an FHA streamline refinance loan, which allows people who already have an FHA loan to refinance into another FHA loan with less documentation and paperwork. But one of the restrictions of an FHA streamline refinance is that the homeowner cannot take cash from the refinance. All the funds from the refinance need to pay the current FHA loan.
With a cash-out refinance, a loan is taken out on the property you already own, with a loan amount that is larger than the current loan payoff (plus the costs of the transaction). You are able to do this transaction by liquidating the equity you have in your home.
For example, if you owe $80,000 on your current mortgage loan and your home is worth $200,000, then you have $120,000 in equity. Now, you are not able to liquidate all of that equity because most programs have a maximum amount of your loan’s value that you can take out. In this scenario, if you wanted to purchase a boat for $25,000, then you could utilize the $120,000 in equity that you have and add the amount you would need to purchase the boat, plus closing costs.
This can be a good strategy if the terms of the new mortgage are better than the old mortgage. If interest rates drop, or if the mortgage is for a shorter term (10 years as opposed to a 30-year mortgage), then this situation may be an intelligent use of credit. However, it is important to note that you still have to pay closing costs when you choose cash-out refinance.
What Are The Benefits of an FHA Cash-Out Refinance Loan?
The benefits of receiving cash over and above the amount that goes to paying off an existing mortgage is that the borrower may apply the excess funds to any number of projects or purchases. This cash from the FHA refinance loan can be used for:
- College tuition
- Home improvement projects
- Paying a car loan or buying a new car
- Debt consolidation
In addition, a borrower can, under certain circumstances, use the opportunity to lower their interest rate, change the loan term, and/or transition from an adjustable rate to a fixed rate, in addition to receiving excess funds. Lastly, the FHA cash-out refinance loan program allows the borrower to refinance as much as 85% of the home’s value.
What Considerations Should Be Made?
Although FHA refinance loans with cash-out have a lot to offer borrowers, there are some disadvantages that need careful consideration. All FHA loans require mortgage insurance premiums that add to the closing costs and monthly payments. So, if your home has significant equity, then it may be best to stick with a conventional cash-out refinance.
What Are The Eligibility & What Are Requirements of FHA Cash-Out Refinance Loans?
When applying for an FHA Cash-Out Refinance, a licensed loan officer will review your income, assets, your credit history, and a brand-new appraisal report on your property.
FHA Cash-Out Refinance loans requirements:
- The homeowner has to meet specific debt-to-income ratio guidelines.
- FHA cash-out refinance loans are strictly for owner-occupied properties. You cannot use this type of refinance on a second home or rental home, and non-occupant co-borrowers are not allowed.
- To be eligible for an FHA cash-out refinance loan, then you must have made your last 12 monthly mortgage payments on time. If you have owned your home for fewer than 12 months, you must have made all your payments on time. These loans are not granted in cases of delinquent mortgage payment histories.
- Should a borrower be in a property for less than a year, then the lower of either the appraised value or original purchase price will be used to calculate the maximum loan amount.
- Generally, for an FHA cash-out refinance loan, lenders will require a minimum credit score between 640 and 680.
If you have more questions about an FHA cash-out refinance loan or other home refinancing options, then start the conversation with your licensed CrossCountry Mortgage loan officer today!