October 24, 2022
A home equity loan is one using the equity in your home for the loan’s collateral. What is equity? It’s defined as the current value of the property minus what you still owe on the existing mortgage loan.
Does the FHA offer a home equity loan? On paper, the FHA does offer a loan that allows you to get cash back at closing time like a home equity loan but the two aren’t really the same thing. Here’s why.
For a home equity loan a borrower typically gets loan funds in a lump sum with a fixed interest rate, similar to an FHA Cash-Out Refinance. Borrowers who default on a home equity loan may face foreclosure the same as a cash-out loan.
And both loans have other things in common–especially where your plans for the money are concerned. Borrowers who want a home equity loan or an FHA Cash-Out refinance are wise to consider their motivations for applying; if you want to use a home equity loan to pay off revolving debt, it’s smart to consider other options first.
Why?
The Consumer Financial Protection Bureau tells its readers to explore alternatives with a credit counselor “that do not potentially put your home at the risk of a forced sale” when trying to find a way to pay down your outstanding debt.
It is very easy to add more debt on a credit card you have used a refinance loan or home equity to pay off. If that happens, you get stuck with both the loan and new credit card debt.
Home equity loans, like FHA refinance loans, include fees and upfront costs, so you want to remember those expenses when shopping for your loan.
The technical answer to the question, “Does the FHA offer a home equity loan” is no–because there is no loan offered by the FHA specifically labeled as an FHA Home Equity Loan. However, that does not mean you cannot borrow against the equity in your home using an FHA mortgage.
The way to get cash at closing time is with an FHA Cash-Out Refinance loan. This is a loan that refinances your original mortgage. It can be conventional, FHA, VA, or USDA.
As long as you have enough equity in your home, you can apply for this FHA loan which features cash back to the borrower at closing time once the original loan, closing costs, and other expenses are satisfied.
With an FHA Cash-Out Refinance, wait to apply until you have at least 20% equity in your home. Don’t apply for cash-out refinancing too early in your home ownership journey; once you have made enough payments and have sufficient equity, you can apply for a cash-out refinance.
It pays to shop around for the new loan–did you know you don’t have to use the same lender you used to buy the property for the FHA Cash-Out loan? It is better to compare offers and pick the most advantageous one for you.
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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