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FHA Cash Out Refinance Pros and Cons
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FHA Cash Out Refinance Pros and Cons

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru
The FHA Cash Out Refinance Mortgage Program is designed to help more borrowers take more cash out of their home.  By enabling borrowers to access the equity in their properties, an FHA cash out refinance mortgage enhances financial flexibility for homeowners.  The proceeds from the loan can be used for any number of purposes including paying off high cost debt, home improvements or paying school tuition.

The program offers borrowers multiple benefits including the ability to refinance with a higher maximum loan-to-value (LTV) ratio which enables them to take more cash out of their homes, lower FHA mortgage rates and more flexible borrower qualification guidelines.  Program negatives include the added cost of FHA mortgage insurance premium (MIP), loan limits and that borrowers must be current on their mortgage.

We review the full list of the pros and cons for an FHA cash out refinance mortgage below.  Borrowers should understand both the positives and negatives of an FHA cash out refinance to determine if it is the right mortgage refinance program for them.

FHA Cash Out Refinance Pros

Mortgage pro

No Property Location Restrictions

Some mortgage programs require that the property being financed is located in a specific geographic area to qualify for the program.  The FHA Cash Out Refinance Program, however, does not have a property location restriction, making it simpler to use.  One-to-four unit owner-occupied properties located anywhere in the United States are eligible for the program.

Mortgage pro

Higher Loan-to-Value (LTV) Ratio than other Cash Out Refinance Programs

The FHA Cash Out Refinance Mortgage Program permits a maximum loan-to-value (LTV) ratio of 85% under most circumstances.  The LTV ratio represents the total amount of loans on a property, including the mortgage, divided by the fair market value of the property.  The maximum LTV ratio for the the FHA Cash Out Refinance Program is higher than for other cash out refinance programs, which enables borrowers to take out more money from their homes.

Mortgage pro

Potentially Lower Mortgage Rate

The mortgage rate on an FHA loan is typically .125% - .500% lower than the interest rate for other cash out refinance programs.  The interest rate for an FHA mortgage is lower because the program is backed by the government and borrowers are required to pay a mortgage insurance premium (MIP), which provide additional protection for the lender in the event the borrower cannot pay back the loan.   The lower mortgage rate on an FHA cash out refinance loan reduces your monthly mortgage payment and potentially saves you thousands of dollars in total interest expense over the life of the loan.


Use the table below to shop lenders and find the FHA cash out mortgage with the lowest interest rate and fees.  While FHA mortgage rates are lower than the rates for other types of loans, the APR and closing costs are higher because you are required to pay an upfront and monthly FHA MIP.  We recommend that you compare FHA and conventional cash out refinance rates and fees to find the best mortgage terms.

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Current FHA Mortgage Rates as of January 23, 2019
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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click here for more information on rates and product details.
Mortgage pro

Flexible Borrower Qualification Guidelines

The FHA Cash Out Refinance Mortgage Program uses more flexible borrower qualification requirements including a lower minimum required credit score and a potentially higher debt-to-income ratio.  The minimum credit score required to qualify for an FHA cash out refinance is usually 580, which is lower than most conventional cash out refinance programs.  Additionally, although the standard debt-to-income ratio limit for the program is 43%, applicants with stronger financial and credit profiles may be able to qualify with a debt-to-income ratio of 50% or higher under certain circumstances.  The debt-to-income ratio represents the maximum percentage of a borrower's monthly gross income that can be spent on total monthly housing expense (mortgage payment plus taxes and insurance) plus other monthly debt such as credit card, student and auto loans.  The higher the debt-to-income ratio, the larger the mortgage you can qualify for. 

Mortgage pro

No Borrower Income Limit

The program does not limit how much money a borrower can earn.  Several other mortgage assistance programs use a maximum income limit to determine borrower eligibility. By not using a borrower income limit, FHA cash out refinance loans are available to more potential home buyers.


Use the FREEandCLEAR Lender Directory to find lenders that offer the FHA Cash Out Refinance Program.

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FHA Cash Out Refinance Cons

Mortgage pro

Added Cost of FHA Mortgage Insurance Premium (MIP)

FHA Cash Out Refinance Program participants are required to pay an up-front and ongoing monthly FHA mortgage insurance premium (MIP).   FHA MIP pays for insurance that protects lenders in the event that borrowers default on their mortgage.  Although it can be added to the mortgage amount, the up-front fee increases your closing costs while the ongoing monthly MIP increases your total monthly housing expense.  The up-front MIP for most mortgages is 1.75% of the loan amount while the ongoing fee depends on the loan amount, LTV ratio and mortgage term.  Borrowers should understand how MIP impacts their upfront and ongoing monthly costs before selecting an FHA cash out mortgage.

Mortgage pro

FHA Loan Limits

There are limits on the size of loan you can obtain through the FHA Cash Out Refinance Program.  FHA loan limits vary by county and by the number of units in the property being financed.  In the contiguous U.S., FHA loan limits for a single unit property such as a home or condominium range from $314,827 to $726,525 for high cost areas and the limit for a four unit property ranges from $605,525 to $1,397,400.  In Alaska, Hawaii, Guam and the U.S. Virgin Islands loan limits range from $1,089,775 for a single unit property to $2,096,100 for a four unit property.  Borrowers who live in more expensive areas of the country may find that the FHA mortgage limits restrict refinance options.

Mortgage pro

Borrowers Must Be Current on Their Motgage

According to FHA Cash Out Refinance Program guidelines, borrowers are required to be current on their mortgage and must have paid their mortgage on-time for the twelve months prior to applying for the loan.  Borrowers who are behind on their mortgage or who have a late payment within the previous twelve months are not eligible for the program.

Mortgage pro

Must Own Property for a Certain Period of Time

The FHA Cash Out Refinance Program requires that borrowers have owned the property being financed for at least six months.  Borrowers that have owned their home for less than six months are not eligible.

Mortgage pro

Non-Occupant Co-Borrowers Are Not Allowed

FHA Cash Out Refinance program guidelines require that all borrowers reside in the property being financed.  Non-occupant co-borrowers or co-signers are not allowed according to program rules.  For example, a parent cannot co-sign the mortgage for a child unless they all live in the property being financed.

More FREEandCLEAR Resources

Mortgage Guides

FHA Cash Out Refinance Guide

Review our in-depth overview of the FHA Cash Out Refinance Mortgage Program including borrower eligibility guidelines and other important program information such as property requirements and mortgage limits.

Resources

FHA Mortgage Rates

FHA cash-out refinance mortgage are provided by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions.  Use our FHA mortgage rate table to review updated FHA mortgage rates and fees for lenders in your area.  Comparing rates from multiple lenders is the best way to save money on your FHA loan.

Resources

Mortgage Refinance Guide

Our Mortgage Refinance Guide walks you through the refinance process step-by-step and includes valuable information, resources and tips.

Mortgage Calculators

Cash Out Refinance Calculator

Use our Cash Out Refinance Calculator to determine how much equity you can take out of your home and how much money you can save by refinancing.

Sources

FHA Cash Out Refinance: https://www.hud.gov/sites/documents/4155-1_3_SECB.PDF

About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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