Routing # 256078446
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FHA Cash-Out Refinance: How Does it Work?
What you'll learn: Everything you need to know about FHA cash-out refinancing and how it works.
EXPECTED READ TIME: 4 MINUTES
October 29, 2024
You may have heard of the Federal Housing Administration (FHA) and the home loan benefits they provide. But did you know that the FHA also has refinance options?
When it comes to finding smart ways to tap into your home’s equity, it is good to understand some of the options you have at your disposal. That is why we are delving into the details on FHA cash-out refinancing, how it works, and the ways you can benefit as a homeowner.
What is an FHA cash-out refinance?
An FHA cash-out refinance is not that different from a traditional cash-out refinance; the only true difference is that your FHA refinance loan is insured and backed by a government agency. It is a type of refinance that allows you to tap into your home equity by replacing your current mortgage with a new one.
Your new mortgage will come with a different interest rate and provides you with a lump sum of funds based on the amount of equity you have access to. However, it is important to note that since you are turning equity into cash, the surplus funds you receive result in a larger balance on the new home loan than your current mortgage principal.
How does a cash-out refinance work?
As is the case with other refinance options, you must meet your chosen lender’s requirements and the FHA’s borrower qualifications in order to be approved for an FHA cash-out refinance. The process of getting an FHA loan involves the following steps:
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Confirm you meet all lender and FHA borrower requirements.
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Research an FHA-approved mortgage lender (preferably one with ample experience handling FHA home loans).
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Submit your application to your chosen lender and provide all required documentation.
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Sign on the dotted line, close on your new mortgage, and receive your funds.
Now that you have an overview of the cash-out refinance process, we will detail exactly what qualifications you need to be aware of so you are prepared for every step.
FHA cash-out refinance requirements
The first step to obtaining a cash-out refinance is ensuring you and your current mortgage are eligible. The great news is that you do not have to currently have an FHA mortgage to be eligible for an FHA cash-out refinance. But there are a few requirements that homeowners must meet in order to be eligible, including:
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You can confirm the property is your primary residence that you have occupied for at least 12 months
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Your current mortgage has passed its seasoning period, typically at least 6 months or 210 days of on-time payments post-home purchase
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You have enough equity built in your home (the FHA requires at least 20% home equity, but be sure to check your lender’s requirement)
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You have a credit score of 620 or higher (as is required by most lenders)
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Your debt-to-income (DTI) ratio does not exceed 43%
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You are not requesting a loan amount that exceeds 80% of your home’s current value
An appraisal conducted by an FHA-approved appraiser will also be required to assess your home’s value and confirm you have enough equity to borrow from.
What are the closing costs for an FHA cash-out refinance?
You will also need to take the closing costs of refinancing into account before you decide to jump into the process. Typically, you can expect FHA cash-out refinancing closing costs to be between 2% and 6% of your total loan amount. These costs and fees are standard, but may vary depending on your lender.
However, along with closing costs, you will also have to pay an up-front FHA mortgage insurance premium fee of 1.75% of the total loan amount. There is also an annual mortgage insurance premium (MIP) that will be factored into your monthly payments, regardless of how much home equity you have built.
Why choose an FHA cash-out refinance?
In general, tapping into your home equity can be a smart financial move for homeowners who need funds. Once the cash is in hand, it is yours to use as you wish for expenses, including:
- Home improvements and renovations
- Debt consolidation
- Education expenses
- Medical care
- And more …
An FHA cash-out refinance may also afford you the opportunity to obtain a lower interest rate if they have dropped since your home purchase. But be sure to ask yourself before refinancing, “Will this make sense and benefit me financially?” Remember, a cash-out refinance replaces your current mortgage with a new, larger one. So, if you are not prepared to add on to the time it will take to pay it off, you may want to consider a different refinance option.
Is an FHA cash-out refinance right for you?
Understanding all of your refinance options will help you better determine which one is right for your homeowner needs. A mortgage refinance is meant to benefit you and help you achieve your financial goals. Before you decide if it is time to jump feet first into the process, be sure to consult with an experienced FHA lender to further discuss your options so you can choose with confidence.
SIMILAR ARTICLES
HELOC vs. Cash Out Refinance—Which Is Right For You?
Home Equity Line of Credit (HELOC), lets you withdraw funds as needed. Cash-out refinance gives you funds all at once. Find out which is better for your situation.
Advantages of Cash-Out Refinances for Home Improvements
For many homeowners, a cash-out refinance is the best way to pay for home improvements. Discover how to finance your renovations and home improvements.
Mortgage Calculator—Know Your Options
Use PenFed's free mortgage calculator and determine your monthly payment, including principal and interest. Calculate conventional, VA, and jumbo home loans.
Your Top Refinancing Questions Answered
Are you thinking about refinancing? See the answers to some of the most common questions borrowers ask when considering a refinance.
Home Buying Steps
Mortgage Products
Disclosures
1Conventional Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
2FHA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 96.5%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
3VA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.125 discount point, which equals 1.125 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $450,000; loan-to-value ratio of 95%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of $995.
4Jumbo Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 0.625 discount point, which equals 0.625 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, non-conforming, fixed-rate loan. Loan amount of $1,009,000; loan-to-value ratio of 70%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.
Routing #256078446
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