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Using Your Home Equity With An FHA Cash-Out Refinance Loan

FHA Loan

There are many uses for an FHA cash-out refinance. These FHA refi loans can be used to refinance FHA and non-FHA mortgages alike, and the funds from cash-out refinance loans can be used for any purpose including paying off credit card debt, making home improvements, and even paying for luxury items like cars or boats.

But what is the best use of cash-out refinance loan proceeds? 

Like many similar home loan questions, the answer depends greatly on the financial needs and goals of the borrower. But there are some issues you should consider when deciding what to do with the money you get from an FHA refinance of this type.

An FHA cash-out refinance loan is a good option for someone who has built up equity in their property over time. The bigger your down payment and the longer you’ve been paying on your mortgage, the more borrower power you potentially have. 

An FHA cash-out refinance loan is an option some homeowners consider when they want to renovate the home.

Why go cash out when you could just as easily apply for an FHA 203(k) Rehabilitation Mortgage instead? One reason is that FHA 203(k) funds aren’t approved for ANY use–that money can only be used for approved projects. 

If you get a Limited 203(k) you can’t do any work on load-bearing walls; if you get a “standard” 203(k) you are still subject to the restrictions placed on the loan.

What kind of restrictions? You can’t add “luxury features” with an FHA 203(k) Rehab Loan. No new swimming pools or barbecues. But with an FHA cash-out refinance, you can.

Some are tempted to use the money from an FHA cash-out refinance loan to pay off credit card debt or to purchase an automobile. 

There are some caveats here; it’s never a good idea to take out a loan to pay off another line of credit if you potentially can run up the old account again in the future. It’s best to pay off debts that will remain fully paid off.

The problem with purchasing a vehicle with the proceeds of a cash-out refinance loan? 

They depreciate, and the price you paid may not be the price you can charge when selling the vehicle later on. It’s a losing proposition if the property you buy with that loan money goes down in value over time (assuming you want to sell later on and earn a profit).

It is a good idea to make very calculated choices when settling on the best uses for the proceeds from a refinance loan. Remember that your original mortgage must be paid off first along with the fees and expenses of the new loan. The amount of cash back will vary depending on those and other factors.

Joe Wallace - Staff Writer

By Joe Wallace

September 1, 2021

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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