FHA Cash Out Refinance – Home Equity
An FHA cash out refinance allows borrowers to refinance their existing mortgages while cashing out additional equity for home improvements, debt consolidation, investments and more. Recently, the FHA updated their guidelines to permit a maximum loan to value of 80% for cash out refinances.
What is an FHA Cash Out Refinance?
An FHA cash out refinance is a new mortgage against the home which pays off the existing mortgage, plus provides additional money from the remaining equity in the home to be used for other purposes.
How to Qualify for an FHA Cash Out Refinance
Qualifying for an FHA cash out refinance is nearly the same as qualifying for any FHA loan. However, there are a few slight modifications which only apply to cash out refinances. These are the minimum requirements to qualify for an FHA cash out refinance:
- Employed for a minimum of 2 years
- Minimum credit score of 500
- No recent bankruptcies
- Maximum debt to income ratio of 50%
- Maximum total loan amount of 80% loan to value
- Need to have made at least 6 monthly payments on existing mortgage before applying
- Cannot have any late mortgage payments
These are just the basic requirements. We can help you to determine exactly how much you can qualify for and provide a rate quote without running your credit.
FHA Cash Out Refinance Example
Below is an example of how an FHA cash out refinance will work. One of the variables that may differ for each person are the closing costs.
|Original Purchase Price||$200,000|
|Current Loan Balance||$180,000|
|Current Appraised Value||$255,000|
|New Loan Amount at 80% of the Appraised Value||$204,000|
|Estimated Closing Costs||$6,120|
|Estimated Cash Out Amount||$17,880|
This is just one example and every scenario will be different. The closing costs will need to be calculated when you speak with one of our lenders.
What Can the FHA Cash Out Refinance Funds be Used For?
The FHA does not restrict what the cash out funds can be used for. However, these are the typical reasons why homeowners opt for a FHA cash out refinance:
- To make home improvements
- To consolidate credit card debt
- To pay off auto loans
- To pay off student loans
- For college savings funds
In the end, you can use the funds for anything you want.
Is an FHA Cash Out Refinance a Smart Decision?
Every situation and reason for applying for an FHA cash out refinance will be different. The only thing that is the same for everyone is the need for additional cash for a purpose.
Most financial experts would prefer that you use the money for things that can build wealth or to pay off high interest debt.
What these experts like Dave Ramsey will caution against is using the money for frivolous things such as vacations and new cars. You should consult with a financial professional to see whether a cash out refinance makes sense for you.
FHA Cash Out Refinance Closing Costs
Something you need to consider before moving ahead with a cash out refinance is the closing costs. FHA closing costs will amount to anywhere from 2%-5% of the loan amount. However, you will not need an inspection which will save you some money and you get a pro-rated discount on the mortgage insurance when you refinance.
The closing costs will be paid for out of the cash out funds or will essentially reduce the amount you can cash out. We suggest reading our article on FHA closing costs, FHA mortgage insurance, and the article about rolling FHA closing costs into the loan.
We can help provide you with a closing cost estimate but your best bet is to look at the closing documents from your home purchase to see exactly what those costs were. Then, plan on eliminating the inspection and a reduction of the mortgage insurance.
FHA Home Equity Loan Options
The FHA does not have a home equity loan option available to homeowners today. You will have just two options:
- FHA cash out refinance
- Home Equity Loan not backed by the FHA
When you get a home equity product, you will likely have an interest rate that adjusts monthly. This adds some long term risk if you plan to take a few years to pay back the loan. The other watch out is your total loan to value ratio (original FHA loan + the home equity loan)
Final Conclusion – FHA Cash Out Refinance
In the end, this loan program may or may not be right for you. The key factor will be the amount of equity you have in your home and what the change in the interest rate will be for you. If you are going to see a significant increase in rate just to cash out a small amount, then you may want to consider finding another way to get the additional funds you are looking for.
Your first step should be to speak with an FHA lender to have a discussion without pulling your credit to determine whether this makes sense for you. Click to speak with an FHA lender who can help.