FHA Cash-out refinance loans: What you need to know

Mortgage Refinance 101 | by Advisor Voices | February 9, 2019
FHA Cash-out refinance loans: What you need to know

What is a FHA Cash-Out Refinance?

A cash-out refinance is a refinancing of an existing FHA mortgage loan, where the new mortgage loan is for a larger amount than the existing mortgage loan, and you get the difference between the two loans in cash.

For instance, if your home is worth $300,000 and you owe $200,000, you have built up $100,000 in equity. With cash-out refinancing you can receive a portion of this equity in cash. If you want to take out $40,000 in cash, this amount would be added to the principal of your new home loan. In this example, you’d get a new loan worth a total of $240,000.

Why homeowners use an FHA cash out loan?

Homeowners use cash-out refinance option for many reasons, here is a top four:

  • Pay off high-interest debt
    Since the loan is secured by your home, you may be able to get a lower rate than unsecured loans like personal loans or credit cards.
  • Get access to cash
    The equity you’ve built in your home is valuable, and you may be able to access it, and then use it when you need it.
  • Get a more stable rate
    If you’re refinancing from a variable to a fixed rate mortgage, you get a more stable rate moving forward.
  • Deduct all or part of your loan
    There may be tax benefits to a refinance with your home as security (talk to your tax advisor to see if you qualify).

The pros of FHA Cash-Out refinance

  • Because it’s secured by real estate, the interest rate is lower than rates for unsecured financing.
  • Because it’s a first mortgage, the interest rate is lower than rates for home equity loans, which are usually second mortgages.
  • The interest may be tax-deductible. Check with a tax pro.

The cons of FHA Cash-Out refinance

  • Underwriting guidelines are stricter than for rate and term refinancing.
  • Costs are higher because surcharges are assessed against the entire refinance, not just the amount of cash-out.
  • Cash-out refinancing takes longer than setting up a home equity loan or personal (unsecured) loan.
  • Increasing the loan-to-value to over 80 percent requires mortgage insurance.

FHA Cash-out refinance requirements

Here are the requirements that you have to meet:

  • Loan-to-value: You must have equity built up in your house to use a Cash-Out refinance. For home loans up to $500,000, the maximum LTV generally is 80%. Above a half-million dollars it drops to 70%. To calculate your LTV divide your current loan balance by the current appraised value of the home or use LTV calculator.
  • Credit score: Most borrowers with a credit score between 640 and 680 will qualify, though the best rates are generally available to homeowners with credit scores of 700 and higher. For a Cash-Out refinance on a home the borrower lives in, generally, the lowest credit score is 640, according to Fannie Mae’s standards.
  • Appraisal: If your home needs repairs or maintenance jobs do it before a home appraisal to get the best appraisal.
  • Payment History: Documentation is required to prove that the borrower has made all the monthly payments for the previous 12 months
  • Debt-to-Income Ratio

How much cash can I gat?

Today, most lenders limit equity borrowing to 80 percent of your cumulative loan-to-value.

For example, if your home is valued at $300,000 and you owe $200,000, then you have $100,000 of equity. At 80 percent cumulative loan-to-value, the total amount of outstanding borrowing would be limited to $240,000 ($300,000 x 0.80 = $240,000). You must retain 20 percent equity in the home, which is $60,000 ($300,000 x 0.60 = $60,000). So, subtract the amount you have to retain from your total equity, and you’d be able to borrow $40,000 ($100,000 − $60,000 = $40,000).

Use Cash-out calculator to know how much cash you able to get out from your home.

When is FHA cash-out refinance a good idea?

A cash-out refinance makes sense in a number of situations:

  • When you have the opportunity to use the equity in your home to consolidate other debt and reduce your total interest payments each month
  • When you are unable to get other financing for a large purchase or investment
  • When the cost of other financing is more expensive than the rate you can get on a Cash-Out refinancing

How long does FHA cash-out refinance take?

The process of getting approved for a cash out refinance tends to be faster than a HELOC or home equity loan. If you ask a loan officer, they’ll most likely say anywhere from 30 to 45 days.