If you have a FHA loan then you may qualify for a cash-out refinance.
Cash in on the built up equity you have in your home.
You can use the cash to renovate your home, consolidate debt, or just about anything you want.
In this article we’re going to go over the pros and cons of FHA cash-out refinance loans and explore alternative options.
RATE SEARCH: Today’s FHA Cash-Out Refinance Rates
What is a Cash-Out Refinance?
If you have equity built up in your home a cash-out refinance converts that home equity into cash.
Let’s say you have a $200,000 home and your FHA loan balance is $100,000. You could get up to $65,000 cash and have a new loan balance of $165,000. You will pay a single mortgage payment each month.
Who should consider an FHA cash-out refinance
- Homeowners with lots of equity
- Mortgage rate higher than current rates
- People with lots of high interest debt
FHA Cash Out Refinance Pros and Cons
FHA cash-out refinance loans are a great option for homeowners who need extra cash. You can make home repairs or renovate the home to increase it’s market value. You can use the low interest debt to pay off high interest debt, like credit cards, student loans, and personal loans.
However, there are many downsides to cashing in on your home’s equity. For one, you’re losing an asset and gaining more debt. Not just regular debt, but debt secured by your home. If for any reason you’re unable to make the payments, your home is in jeopardy of being foreclosed on.
- Make home repairs/renovations
- Low interest rates
- Peace of mind of cash in reserves
- Use the money to invest
- Get rid of high interest debt
- Maximum loan-to-value ratio 85%
- Reduces the amount of home equity you have
- Debt is secured by your home
- Increases your mortgage payment
- Must pay closing costs
FHA Cash-Out Refinance Requirements
In order to be eligible for a cash-out refi you’ll need to meet some basic requirements. Here are some of the guidelines and requirements for a cash-out refinance.
- 600 credit score or higher (varies depending on lender)
- Must have at least 75% loan-to-value ratio (LTV ratio)
- Owner-occupied properties only
- Single family home, 2-4 units, condo and town homes FHA eligible
- No late payments in past 6 months
- No more than a single late payment in past 12 months
- Debt-to-income ratio below 41%
FHA Streamline Refinance Program
The FHA streamline refinance program is a way for homeowners with an FHA-insured loan to refinance their mortgage into a lower rate and get a lower mortgage payment. In order to qualify for the streamline program you must have had your FHA home loan for at least 210 days.
You will not be able to get any cash back using streamline refinancing. However, you will be able to quickly and easily streamline the refinance process to get a lower mortgage rate and monthly payment with an FHA-approved lender.
Getting Rid of Mortgage Insurance
Mortgage insurance premium (MIP) is changed annually on FHA-insured mortgages regardless of the loan-to-value ratio. One of the main reasons borrowers look into FHA refinancing is to eliminate the mortgage insurance premium fee.
If you have an LTV ratio below 78% then a conventional loan would not require PMI.
With an FHA refinance you’ll need to have MIP regardless of the LTV ratio.
Adding a co-borrower or co-signer that was not on the original FHA mortgage is not permitted. If you’re using a non-occupant co-borrower they should be on the original FHA mortgage loan.
Fixed-Rate and Adjustable-Rate Mortgage Terms
You can get an FHA cash-out refinance loan with a 15-year, 30-year fixed-rate mortgage, or as an adjustable-rate mortgage.
Loan-to-value ratio is the amount of the loan compared to the market value of the home.
For example: If your home is worth $200,000 and the loan has a balance of $100,000 the LTV ratio is 50%.
An FHA cash-out refinance will let you borrow up to 85% of your home’s market value.
The FHA home loan allows for the lowest credit scores of all types of mortgage programs available. With just a 500 FICO score a borrower could qualify with a 10% down payment.
However, lenders set their own credit requirements and many will require at least a 580-600 credit score for FHA. The same will apply for cash-out refinancing, you will typically need at least a 580-600 credit score.
Home Equity Loan
A home equity loan works similarly to a cash-out refinance. However, instead of wrapping up two loans into one, you will have 2 separate loan payments. A home equity loan will lend up to 80% LTV ratio at a mortgage rate slightly higher than a cash-out refi.
A HELOC, home equity line of credit works like a credit card. You can borrow only what you need and repay it monthly. The credit requirements for home equity loans is usually much higher.
If you need cash to renovate or make repairs to your home or for anything else, then an FHA cash-out refinance is a great option.
Use your home equity to get the money you need.
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.