What is an FHA Cash-Out Refinance?

Tap into Your Home's Equity with an FHA Cash-Out Refinance Loan

If you've been in your home for some time or you've made some upgrades – or both, chances are your home may be worth more than what you owe on your mortgage. The difference between your home's value and what you owe on it is your available equity, and when you choose a cash-out refinance, you can gain access to that extra equity.

Refinancing with a loan backed by the Federal Housing Administration (FHA) could make it easier for you to qualify, especially if you have less-than-ideal credit, variable income or a higher debt-to-income ratio. That's because FHA loans tend to have more relaxed lending guidelines.

What are FHA loans?

The FHA was created in the 1930s to make home ownership more affordable. The FHA doesn't actually loan the money; it simply underwrites, or insures, loans so lenders feel more comfortable lending out money to borrowers they might otherwise consider to “risky” to qualify for loans. In addition to underwriting mortgages for purchasing a home, the FHA also provides refinancing loans with the same relaxed requirements. Plus, while most lenders prefer to write loans no higher than 80 percent of the home's value, the FHA allows loans of up to 85 percent of the value, so you can gain access to more of your equity.

Why choose an FHA cash-out refinance?

There are lots of reasons to tap into your home's equity, including:

• To pay for college or other education for themselves, a child or grandchild
• To pay for other major expenses like a wedding or a dream vacation or family reunion
• To make upgrades to the home, like a pool, new deck or addition, that will make living in the home more enjoyable and potentially raise the home's value
• To make improvements like walk-in-showers that will enable older homeowners to "age in place"
• To fund a nest egg or other investments
• To consolidate higher-interest debts like credit cards, personal loans or car loans