The FHA cash-out refinancing program enables homeowners to borrow money against their property to pay off their mortgage and get some extra cash on the side. The total amount that you can borrow depends on the equity that your home has built up over the years.
Equity is defined as the difference between the current home value and the balance remaining on the mortgage. The minimum equity requirement for the FHA cash out refinancing is 20 percent.
According to the Federal Reserve, homeowners can tap about $15 trillion in equity that is just sitting around untouched. You could have used that money to pay off your debts, renovate your home, and other financial needs.
How to Compute the Amount
For example, you initially borrowed $300,000 from the FHA to purchase your property. You religiously paid the monthly mortgage payments. Over the years, with the market improving, the value of your home increased to $400,000, with $200,000 remaining on the mortgage.
Now, you are allowed to borrow as much as 80 percent of the market value of your home. In this case, the amount translates to $320,000. When you deduct the mortgage amount of $200,00, it still leaves you with $120,000, which represents the “cash-out” amount. Of course, you also have to pay the closing fees, but you get the idea.
How Can You Benefit From Cash-Out Refinancing?
You can take advantage of this FHA tool to solve some of your money problems. For instance, with cash-out refinancing, you can:
- Pay off your credit card debts — Credit card companies are notorious for slapping high-interest rates on delayed payments. You can consolidate all your debts and pay them off at once.
- Reduce your monthly mortgage — Consult with a financial advisor to see if it makes sense to refinance your home right now. Presently, however, the interest rates are the lowest in recent years. You can cut down your monthly payments when you refinance your home.
- Stop paying for mortgage insurance — When you pay off all your mortgage, you also stop paying for the insurance. It will give you even more cash in the pocket that you can use for other needs.
- Pay fixed rates — If you are under the adjustable mortgage rate program, you are under the mercy of the market. You can rationalize your budget with fixed monthly payments.
Do You Need a Good Credit Score?
It would help if you had a good credit score to apply for FHA cash-out refinancing. People who tip the scale at below 580 are considered as having a low credit score. As you know, you will find it almost impossible to obtain a loan from a bank if you have bad credit.
With that said, the cash-out refinancing is a much better option compared to the home equity loan.
With the home equity loan, the lender will refinance your mortgage. It means that if you default on your loan, the lender will have primary ownership of your property. For instance, if you sell the house through foreclosure, the lender is entitled to receive the proceeds.
The home equity loan requires that you have a credit score of at least 680 or higher. In contrast, you can apply for cash-out refinancing if your score is 620.
Finally, if you want a solid home mortgage cash out refinance guide, click here.
