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Understanding FHA Cash-Out Refinancing

  • April 22, 2020

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Understanding FHA Cash-Out Refinancing

You can replace your current home loan with another mortgage, which is higher than your remaining loan balance through FHA cash-out refinancing. By doing this, you are cashing-out the difference between the two mortgages. You can then use it to remodel your home or consolidated high-interest debts. You can also use it for other financial goals you have.

You might be thinking: how does this work? Why do you even need one, and what is the risk of getting a cash-out refinancing.

How does it work?

By refinancing a mortgage, you are replacing an existing loan with a new one for an equal amount. Typically, the new one has a shorter loan term or has a lower interest rate or both.

Related: 5 Reasons To Refinance Your Home That Every Homeowner Should Know

On the other hand, cash-out refinancing allows you to withdraw a portion of your home equity in a lump sum. However, the interest rates will be a little higher because you are getting a higher loan amount. Usually, lenders will only allow you to withdraw up to 80% of your home’s value, helping you to maintain an equity cushion.

Why use a cash-out refinance?

Cash-out refinancing has many advantages compared to other types of loan products if you need a large amount of money. Below are some of the main reasons why FHA cash-out refinancing is a good choice:

  • You will get a lower interest rate on your mortgage. Cash-out refinancing will get you a larger loan and would help you lower your interest costs.
  • You can make home improvements or repairs. Using cash-out refinancing for these types of projects can cute the mortgage interest from your taxes. Moreover, utilizing your home’s equity could save you more money compared to other kinds of financing, like credit cards, personal loans, or equity loans.
  • Consolidation and paying off high-interest debt. Cash-out refinancing is good if you can cut your primary mortgage’s interest rate and use the funds you will get properly.
  • Pay off your child’s college tuition. If your adult child needs some cash assistance for college, you can use your home’s equity to cover the shortage. It is a smart move if the rates of the student loan are way higher compared to what you are going to get with a cash-out refinance.

What are the risks of cash-out refinancing?

Cash-out refinancing is not always the best choice for every situation. Here are some of the reasons:

  • If it is going to increase the interest rate of your current mortgage. As a rule, refinancing is being used to improve your financial situation and get a lower rate. If cash-out refinancing increases your rate, it may not be a good choice.
  • If it slows out the repayment of a current debt for decades. If you are going to choose cash-out refinancing for debt consolidation, you have to make sure that it would not drag out the debt repayment over decades when you could have paid it off in lesser time with lower total cost.
  • It increases the risk of losing your home. Failing to repay your loan could lead to foreclosure. Make sure that you are only taking the cash that you need and use it to improve your financial situation.

FHA cash-out financing could be beneficial to improve your financial situation if you are going to use it wisely. Don’t forget to speak to a lending expert to see what is best for you.