Uses for FHA Cash-Out Refinancing
These FHA loans can be used for refinancing non-FHA mortgages as well as existing FHA loans. The proceeds from an FHA cash-out refinance can be used for any purpose including paying off credit card debt, making home improvements, and even paying for luxury items like cars or boats.
Refinancing the loan means you'll still make a mortgage payment, and you'll need to decide how to handle the new loan's closing costs. An appraisal is required to determine the home's value at application time--these are mandatory for any cash-out refinance loan, so be prepared for that expense as well.
Using the Money From a Cash-Out Refinance
An FHA cash out refinance loan is an option for someone who is current on their mortgage and has built up equity in their property over time. The loan amount is dependent on a new appraisal, and the amount of cash back depends on how much equity you have.
An FHA cash-out refinance loan is one choice some homeowners consider when they want to to renovate or remodel their property. It is also an option for those who want to pay for renovations on a property that is not their primary residence.
Some borrowers ask; "Why choose a cash-out refi when you could apply for an FHA 203(k) Rehabilitation Mortgage instead?" One reason is that FHA 203(k) funds aren’t approved for ANY use--that money can only be used for renovation work in the home securing the loan and those projects must be lender-approved.
If you get a Limited 203(k) you can’t do any major structural work. Those applying for a “standard” 203(k) would still be subject to the restrictions placed on the loan.
You are not permitted, for example, to use 203(k) rehab loan funds to add or install “luxury features”. That includes swimming pools, barbecues, and similar amenities.
That is one reason why a borrower might choose to refinance their existing mortgage with a cash-out loan--no restrictions on the funds or how they can be used to repair a home.
You may consider using the money from an FHA cash-out refinance loan to pay off credit card debt or to purchase an automobile. But is this a good idea?
It is smart to consider the logic of using a refinance loan to pay off another line of credit--will you run up the old account again in the future? If so, you could negate the entire reason for taking out the loan in the first place. It’s best to pay off debts that will remain fully paid off.
If your financial goals include lowering your monthly payment, a cash-out refinance might not be the best option. You may wish to consider FHA streamline refinance options instead if you have an existing FHA home loan.
And what about purchasing a vehicle with the proceeds of a cash-out refinance loan? The elephant in the room with doing so is the fact that vehicles depreciate immediately. You won't be able to sell the vehicle for the same amount of money you paid for it and may even take a loss.
It is a good idea to make careful choices when settling on the best uses for your refinance loan. Remember that your original mortgage must be paid off first along with the fees and expenses of the new loan.
The amount of cashback will vary depending on those and other factors. You will also want to check the interest rate on the new mortgage and make sure you know how the cash out refinance rates stack up against rates for home equity loans, or even a rehab mortgage if you specifically want to use the loan to remodel the home.
Learn About the Path to Homeownership
Take the guesswork out of buying and owning a home. Once you know where you want to go, we'll get you there in 9 steps.
Step 1: How Much Can You Afford?
Step 2: Know Your Homebuyer Rights
Step 3: Basic Mortgage Terminology
Step 4: Shopping for a Mortgage
Step 5: Shopping for Your Home
Step 6: Making an Offer to the Seller
Step 7: Getting a Home Inspection
Step 8: Homeowner's Insurance
Step 9: What to Expect at Closing
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