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The FHA cash-out refinancing option is especially beneficial to homeowners whose property has increased in market value since the home was purchased.

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FHA Cash-out Refinance Mortgages

Sometimes It Pays to Refinance

A Cash-out Refinance allows homeowners to liquidate their existing home equity in order to get cash in hand, while replacing their current mortgage with a new one that has a larger principal. By agreeing to open a new home loan with a bigger balance than what you owe at present, the excess funds (after closing costs) go directly to you. The amount of cash that you borrow depends on the amount of equity you have amassed that is used as collateral.

Cash-out refinances have been risky; that’s how many home owners suffered during the last recession. But while some lost their homes, others were able to grow their businesses and make a fortune with the cash-out.

Cash-out Refinance Guidelines

FHA cash-out refinances have more lenient guidelines, giving borrowers with lower credit scores and a higher debt-to-income ratios a chance to qualify.

As of July, 2010, borrowers must have a minimum credit score of 500 to qualify for any FHA loan, assuming there is a 10 percent down payment. For an FHA cash-out refinance that limit is raised to 15 percent. Most FHA insured lenders, however, set their own limits, and will most likely require a much higher credit score since cash out financing is more carefully approved than even a home purchase. Consult your loan officer regarding the lending institution’s credit requirements in such cases.

The FHA cash-out maximum loan-to-value is 85 percent of the home’s current value. Your debt ratio is required to be below 41 percent when refinancing with cash-out, which is why many borrowers choose to pay off certain debts, in order to keep the debt ratio low.

Pros and Cons of a Cash-out Refinance

A cash-out refinance is a smart option in many cases. Whether it’s home improvement, college tuition or medical bills, you are able to access money that you have in an illiquid asset and put it towards a number of different expenses. This is especially appealing since the interest rates on a mortgage are almost always better than student loans or credit cards. You can also take advantage of the better rates by consolidating debt, by transferring credit card balances to a mortgage, which is also considered a cash-out refi. Many homeowners even choose to get a cash-out refi to create a personal cash cushion, or put the money to work by investing.

It’s important to take into account the downsides of cash-out refinances as well. The refinance is treated just as any other mortgage transaction, where you’ll need bank statements, W-2 forms, pay stubs, and much more. Not only is it time consuming, but pricey as well, since there will be closing costs that need to paid. Taking out equity on your property also means taking on the risk of owing more than what your home is worth, since default rates on cash-out refinances are higher than other mortgages.

Remember to always weigh the pros and cons of a cash-out refinance, and ask yourself whether you will benefit in the long or short term.


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