An FHA cash-out refinance is a type of mortgage refinancing that allows homeowners to borrow more money than they currently owe on their mortgage and receive the difference in cash. The new mortgage is insured by the Federal Housing Administration (FHA) and is based on the homeowners equity level, what they still owe on their current loan, and how much extra funds they need. The amount of money that can be borrowed depends on the amount of equity that has been built up in the homes value, and borrowers will need at least 20% equity in the property based on a new appraisal to be eligible for an FHA cash-out refinance.

An FHA cash-out refinance can be used for a variety of purposes, including paying for college, renovating a kitchen, consolidating high-interest-rate debt, covering higher education expenses, starting a business or side hustle, and more. The process for an FHA cash-out refinance is similar to other cash-out refinance loans. Homeowners need to shop around for the best rate with FHA-approved lenders, provide proof of their income for the past two years, have their credit report and scores pulled, and lock in their interest rate.

FHA cash-out refinance loans come with benefits that can make them an attractive option for homeowners looking to pull equity from their homes. These benefits include flexible eligibility guidelines, lower interest rates, and the ability to spend the money from the refinance on anything the homeowner wants. However, its important to consider the drawbacks before shopping around with lenders and formally applying for a loan. These drawbacks include increased debt, higher rates for lower credit scores, and the need to have made on-time mortgage payments for the past 12 months.