A lot of homeowners are turning to FHA cash-out loans as a way to finance their home improvement. There are many reasons why refinancing with an FHA loan can be a smart move, but it’s important to understand the pros and cons of this type of loan to ensure you’re making the best decision for you and your financial goals.
Let’s take a look at how these home improvement loans work, why they are so popular right now, and what you should know before applying for one.
What Is an FHA Cash-Out Refinance?
A lot of our clients who come to us for home improvement loan guidance ask about cash-out refinance loans. With a cash-out, what happens is you take out a new mortgage for more than your home is worth. Then, you receive the difference between your mortgage balance and the current value of your home in cash.
With an FHA cash-out refinance, you’re refinancing to an FHA loan, which is a loan insured by the Federal Housing Administration. FHA loans were designed to make it easier for borrowers who wouldn’t necessarily qualify for a standard mortgage to qualify for a home loan. With FHA loans, the requirements are more relaxed so if your credit score has seen better days, you may still be able to qualify to refinance.
Why a Cash-Out Is a Good Option for Financing Your Home Improvement
As long as you have enough equity built up in your home, you’ll have plenty of money from the cash-out to pay for your home improvement. Tapping into your equity can be a smart way to pay for your home improvement project because you’ll be able to use your low mortgage interest rate. Mortgage rates are usually lower than other types of financing such as personal loans. And, with current mortgage rates being so low, now could be a great time to refinance to a lower rate anyway.
The other advantage is, you have the freedom to use the funds from the cash-out how you want to. So, if you receive $50K from refinancing to an FHA loan and need $40K to renovate your home, you can use the other $10K for debt consolidation or to help you reach your other financial goals.
What You Should Know About FHA Cash-Out Refinancing
While there are many advantages to refinancing with an FHA cash-out to finance your project, there are requirements and expenses you’ll want to be aware of before getting started.
- You’ll have to pay for a new appraisal to assess the current value of your home.
- You’ll have to pay a mortgage insurance premium – expect to pay 1.75 percent of the loan amount upfront.
- While an FHA loan isn’t as difficult to qualify for, you may also end up paying mortgage insurance payments for the entire life of the loan, increasing your overall financing costs.
- You have to have at least 20 percent in equity already – the maximum loan-to-value ratio for FHA cash-out loans is 80 percent.
How Should You Finance Your Home Improvement?
Using an FHA cash-out refinance is only one of many ways to cover the costs of your home improvement. If you’re worried you won’t qualify for a conventional loan but you are interested in refinancing and using the extra loan amount to fund your project, FHA refinance loans can help you reach your goals.
If you want more home improvement loan guidance, contact the team at Pure Finance Group. We can help you find a great loan for your needs, and we also offer financing for home improvement projects up to $100K. Reach out today to learn more about our low-cost options.