FHA Cash Out Refinance | A Step-by-Step Guide
What is an FHA Cash Out Refinance?
FHA Cash Out Refinance loans allows homeowners to access the equity in their home.
The Federal Housing Administration mortgage loan underwriting guidelines give homeowners the ability to withdraw the equity from their single-family homes that are owner occupied by using an FHA cash out refinance.
How does an FHA Cash Out Refinance work?
With an FHA Cash Out Refinance, you can increase your new loan amount by an amount that exceeds your existing mortgage loan balance.
The difference from your new loan amount minus your current mortgage loan balance is the funds that will be disbursed to you at closing minus any closing costs.
The new loan will be insured by FHA. This borrower paid insurance premium protects the lender from financial loss and adds a layer of protection to the lender.
What is the maximum LTV and Equity I can withdraw from my home?
In accordance to FHA underwriting and loan approval guidelines, homeowners are allowed to withdraw up to 80% the value of their home’s equity for any purpose.
The home’s equity is calculated by taking the difference between what your home is worth and what you owe on the sum of all your mortgages.
What are the approved reasons for cash out under FHA?
In accordance to FHA underwriting guidelines, there are no restrictions for the purpose of the cash out you will receive from refinancing.
The 3 Most common reasons for FHA Cash Out
The three main reasons why homeowners use cash out refinances are for debt consolidation, home improvements or cash out for personal reasons like, weddings, travel excursions, college expenses.
What does an FHA Cash Out for Debt Consolidation do?
FHA cash out debt consolidation loan will lower the total of your monthly payments from credit cards, auto loans, personal loans and even student loans.
You can use the equity in your home to consolidate the payments of credit cards, auto loans, personal loans and student loans into 1 monthly payment.
This will lower the total of your monthly bills and create financial relief from high interest rate credit cards and bills. This will can save you a lot of money each month.
Benefits of FHA Cash Out Debt Consolidation
- Simplifies your bills by only having one payment per month
- Lowers your total monthly bills
- Creates monthly positive cash flow
- You can pay off your home faster
- Interest on the mortgage is tax deductible
If your monthly income is equal to your monthly bills, then an FHA debt consolidation mortgage loan can give you the ability to rebalance your monthly income and debts.
This debt consolidation program can relief individuals of financial stress.
How does an FHA Cash Out for Home Improvements work?
FHA cash out for home improvements loan gives you the ability to access the equity in your home to pay for home repairs and remodeling.
This cash out home improvement program is for homeowners who would like to avoid the expensive cost of secondary financing, like second mortgages, and home equity lines of credit to pay for home improvements.
Benefits of FHA Cash Out for Home Improvements
- Get immediate access to the funds for nonstructural remodeling and repairs
- Affordable financing terms compared to second mortgages and home equity lines of credit (HELOCS)
- Increase the value of your home based on remodel
- Can complete the work yourself or hire professionals
The FHA cash out for home improvements is a good program for “Do It Yourself” homeowners that are planning on making home repairs or improvements.
If the plans to remodel require structural changes to the home then you will have to use the FHA 203K rehab remodel loan.
How does an FHA Cash Out for Personal Use work?
The FHA cash out for personal use allows you to withdraw the equity in your home for personal use.
Under FHA underwriting guidelines there are no restrictions for how you intend to use the fund that you withdraw.
The new cash out loan amount can not exceed 80% the value of your home as determined by the real estate appraised home value.
Benefits of an FHA Cash Out for Personal Use Loan
- Can withdraw the equity in your home for undisclosed use of funds
- Cost of financing is lower compared to unsecured lines of credit like credit cards and personal loans
- Equity withdraws can be used for investments
- Cash out for family trips, college costs
FHA cash out for personal use gives homeowners the freedom to withdraw the equity in their homes to use for undisclosed purposes.
The FHA cash out loan gives homeowners the ability to borrow money at a lower interest rate compared to unsecured lines of credit.
What are the FHA Cash Out Refinance Guidelines
To be eligible for an FHA Cash Out Refinance, the borrower must meet certain guidelines set by the FHA. Here are some of the key FHA requirements:
- The borrower must have owned and occupied the home as their primary residence for at least 12 months prior to applying for the loan
- The borrower must have a minimum credit score of 580
- The maximum LTV ratio is 80%. This means that the borrower can borrow up to 80% of the appraised value of their home.
- The borrower must be able to show that they can afford the new loan payments. This is typically done by providing proof of income, employment, and adhering to the Debt to Income ratios determined by FHA.
- The borrower must pay FHA mortgage insurance premiums (MIP). The upfront MIP can be financed into the loan, and the annual MIP is paid in monthly installments.
How to calculate FHA cash out maximum loan amount and maximum cash out?
The maximum LTV ratio for an FHA Cash Out Refinance is 80%.
This means that the borrower can borrow up to 80% of the appraised value of their home. For example, if the home is appraised at $300,000, the borrower can borrow up to $240,000 ($300,000 x 0.80).
In this example, if your existing mortgage balance is $100,000 and the closing cost are $6,000 then your FHA available cash out for debt consolidation, home improvements or for personal use would be:
$240,000 (new loan amount) minus $100,000 (existing loan balance) minus $6,000 (closing cost) =$134,000 available cash out.
It's important to note that the LTV ratio is based on the appraised value of the home, not the purchase price or the outstanding balance of the existing mortgage.
If the home has increased in value since it was purchased, the borrower may be able to borrow more than the original purchase price.
Are FHA Cash Out Refinance lower than other loan programs?
Yes FHA cash out refinance loans have lower interest rates than conventional loans if your credit score is below 680, home equity loans (HELOCS), and second mortgages.
FHA does not have any adjustments to the interest rate for withdrawing the equity in your home.
Under FHA you will receive the same interest rate and closing cost compared to a purchase loan or rate and term mortgage refinance.
What are the FHA Cash Out Refinance Rates Today?
FHA interest rates are updated daily. To check interest rates for your loan inquiry you can use EquiFund’s mortgage app.
To get the best FHA Cash Out Refinance rates EquiFund’s mortgage app uses an online mortgage rate finder that will identify the lowest interest rate mortgage matched to your profile in under 3 minutes.
Summary of Benefits of an FHA Cash Out Refinance
There are several benefits of an FHA Cash Out Refinance that make it an attractive option for homeowners. Here are some of the main benefits:
- Access to Home Equity: An FHA Cash Out Refinance allows homeowners to access their home equity and use it for other purposes, such as home improvements, debt consolidation, or investments.
- Lower Monthly Payments: By refinancing their mortgage, homeowners can often lower their monthly payments and reduce their overall interest rate. This can save them money in the long run and make their mortgage more affordable.
- Fixed Interest Rate: With an FHA Cash Out Refinance, borrowers can choose a fixed interest rate, which means that their monthly payments will stay the same for the life of the loan. This provides stability and predictability for homeowners.
- Tax Benefits: The interest paid on a mortgage is tax-deductible, which means that homeowners may be able to save money on their taxes by deducting the interest paid on their FHA Cash Out Refinance loan.
- Easier Qualification: The FHA Cash Out Refinance program has more lenient credit and income requirements than some other types of cash-out refinance programs. This makes it easier for some homeowners to qualify for the loan.
Drawbacks of an FHA Cash Out Refinance
While there are many benefits of an FHA Cash Out Refinance, there are also some drawbacks to consider. Here are some of the main drawbacks:
- Mortgage Insurance Premiums: Borrowers are required to pay mortgage insurance premiums (MIP) on an FHA Cash Out Refinance loan. This can add to the overall cost of the loan.
- Closing Costs: Refinancing a mortgage typically involves closing costs, which can add up to several thousand dollars. Borrowers should factor in these costs when deciding whether to refinance their mortgage.
- Lower Equity: By taking out a cash-out refinance, homeowners reduce their home equity. This means that if they sell their home in the future, they may have less equity to use for a down payment on their next home.
The 7 Steps to Getting an FHA Cash Out Refinance
- Compare Mortgage Lender rates and terms using EquiFund’s nonbiased online mortgage rate finder.
- Select the loan with the lowest annual percentage rate.
- Upload the required income documents
- Review and E-Sign the initial FHA loan disclosures
- Order the real estate appraisal
- Clear underwriting conditions
- Schedule loan closing
FHA Cash Out Refi Conclusion
An FHA Cash Out Refinance is a type of mortgage refinancing that allows homeowners to access their home equity and use it for other purposes, such as home improvements or debt consolidation.
The program has specific guidelines and requirements, including maximum LTV ratios, credit score minimums, and MIP payments.
FHA Cash Out Refinance offers an affordable financing option for homeowners who have equity in their home. The benefits of FHA include are fixed interest rates, tax benefits, and easier qualification.
It's important for homeowners to consider both the benefits and drawbacks of an FHA Cash Out Refinance before deciding whether it's the right option for their needs.
Equifund Mortgage is available for any questions or assistance you may need. We have educated and helped thousands of homeowners navigate the decision-making process of refinancing their home.
