FHA cash-out refinance: how does it work?

An FHA cash-out refinance works similarly, except the loans are insured by the FHA. Since it is government-backed, you might be eligible for lower rates than you might get with other refinancing options. You might even qualify if your credit score is less than ideal.

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Cash-out refinance FHA: example

To give you an idea of how an FHA cash-out refinance works, let’s take a look at an example. Say you owe $200,000 on your current mortgage and home appraisal has determined the property is worth $400,000. If you got an FHA cash-out refinance, you could borrow as much as 80% of the home’s value, or $320,000.

If you needed $100,000 for home improvements, you would undo a new mortgage application process, like you did for your first home loan, for a $300,000 loan instead. If approved, $200,000 of that would go toward paying off your previous mortgage. And instead, you will start making repayments on your new $300,000 mortgage each month.

As with any type of refinancing, you must also consider closing costs. This is just another factor to consider if you are planning to roll those expenses into your new home loan.