What Is a FHA Cash-Out Mortgage Refinance?

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A FHA cash-out mortgage refinance occurs when a homeowner chooses to refinance his FHA mortgage in order to receive the equity in cash. Some homeowners want to access the equity in their home to pay for their children’s education, purchase a car or make improvements on their home.

How the Equity Value is Determined

The equity of a home is the difference between the amount owed on the current mortgage and the value of the home based on a current appraisal. This dollar amount can become substantial because most homes appreciate over time. Improvements made by the homeowner will also increase the value of the home providing more equity in a shorter time frame. 

Property and Homeowner Eligibility

The FHA, Federal Housing Administration, requires a second appraisal of the property and will allow a cash-out mortgage refinance with either an 85%, or a 95%, limit of the appraised value. The percentage allowed is based on the total loan value of the property. The homeowner must also be current on all payments, qualify for the new loan based on their credit and have lived in the home for the past 12 months. The new, larger FHA mortgage will replace the old FHA mortgage at the current market interest rate.