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Cash-out refinancing is an excellent solution for homeowners who have built up a lot of home equity, who qualify for a lower mortgage rate than they are currently paying, and who are in need of cash for other important expenses. A cash-out refinance loan allows you to refinance your current mortgage, while also borrowing cash. The two amounts are added together to form one new loan at your qualified mortgage rate.
One of the questions we get most often about cash-out refinancing is if this option can be applied to FHA mortgage loans. The answer is a resounding YES. You can do an FHA cash-out refinance. This is true whether you are looking to refinance your existing FHA home loan, or you have another type of mortgage loan and are able to qualify for an FHA cash-out refinance loan. It may enable you to qualify for a lower mortgage rate and cash out as much equity as needed.
How Much Can I Cash Out with an FHA Refinance?
The FHA cash-out refinance program will let you refinance your mortgage loan for up to 80% of your home’s current appraised value. You will need to have built up a certain amount of equity and meet other financial qualification standards, which we will outline later.
Let’s say you currently owe $250,000 on your mortgage loan, and your home is appraised for $400,000. That means you have $150,000 of home equity ($400,000 minus $250,000). An FHA cash-out refinance could allow you to refinance up to 80% of the appraised amount, which would be a limit of $320,000. In this example, you would be able to cash out as much as $70,000 ($320,000 loan minus the $250,000 still owed on your existing mortgage).
You don’t necessarily need to cash out this full amount, and you should never take out more than you actually need. You are essentially borrowing the cash from your own home equity. Anything you don’t need right now should stay in your property. Let it continue to grow until you are ready to sell and move up into a new home. More home equity gives you more leverage as a home buyer in the future.
It’s best to only cash out what you need and utilize it for important expenses. Some common examples may include investing in major home improvements, paying off other high-interest debts or covering unexpected life expenses like large medical bills.
How Do I Qualify for an FHA Cash-Out Refinance?
There are several qualifying factors required to meet the FHA’s eligibility standards for their cash-out refinance program:
• The property being refinanced must be your primary residence
• You must have at least 20% equity in your home
• You must have lived in the home for at least 12 months (and be able to prove it)
• You have made your mortgage payments on time for at least 12 months
• Your maximum loan amount can be no more than 80% of the home’s appraised value
• You must have a minimum credit score of 600
• You cannot have any unpaid federal or defaulted debt
• Your debt-to-income (DTI) ratio should be less than 43%
• Your new loan must stay within current FHA loan limits
• Two types of mortgage insurance will be required:
- Upfront mortgage insurance premium (UFMIP)
- Monthly mortgage insurance premium (MIP)
Your FHA-approved mortgage lender and the regional Federal Housing Administration (FHA) office will review all of these factors, as well as your employment and income situation, to determine your cash-out refinance eligibility. If you qualify, you can lock in the best possible mortgage rate and complete the refinance loan. Once approved, your new mortgage loan will replace your old one and the cash you are borrowing will be wired directly to your bank account.
Drawbacks of FHA Cash-Out Refinancing
Keep in mind your new monthly mortgage payments will likely be larger than your old ones, even if you qualify for a lower interest rate. This may depend on how much time you had left on your original loan and how long your new mortgage loan term is. Talk with your mortgage lender and be sure to get accurate monthly payment estimates to be certain you can afford the new payments moving forward. If your cash-out refinance loan defaults because you cannot keep up with payments, you could lose your home and never regain that equity you borrowed.
If you are a homeowner in the Atlanta area and are interested in learning more about your FHA cash-out refinancing eligibility—as well as other potential lending solutions to tap into your home equity—contact Moreira Team | MortgageRight today. Let our team guide you through the process and help you make the right home loan decisions.