Do you have an FHA loan? Are you thinking of refinancing to get a better rate, change the term of the loan or switch from a variable rate loan to the stability of a fixed? Then you may also want to tap into the equity you have while you’re in the process of refinancing your existing FHA loan. There are two types of FHA refinancing. The most common is what lenders refer to as a “streamline” refinance. A streamline is an option when replacing one FHA loan with a new one. It’s referred to as a streamline due to the reduced documentation needed to close the loan.
How much documentation is reduced? There are no credit report or credit score requirements. There is no need to verify employment or even income. There’s no need for an appraisal, either. As long as there is no more than one payment made more than 30 days past the due date over the past 12 months and no such payments within the previous six, the existing FHA loan is eligible for the streamline process.
However, should you decide that you want to pull some equity out while refinancing in the form of cash in your pocket, the loan will be processed in a similar manner as a purchase loan. This means you’ll need to provide recent pay check stubs and bank statements. Your lender will also order an appraisal to get an update on the current market value of your home.
Let’s say you purchased your home using an FHA loan a few years ago. Rates have fallen and you decide it’s time to refinance and switch to a 15 year loan. Your property value has increased since you purchased the home and after the appraisal has been completed you see there is an additional $50,000 in equity you gained over time. You have the ability to borrow enough not just to pay off the existing FHA loan but take care of your closing costs as well. You can then take part or all of that $50,000 as cash in your bank account.
When you pull out cash during an FHA refinance you can use the money for anything you want. You can pay off higher interest rate credit cards, take care of outstanding student loans, pay off your automobile loan or even take a family vacation. The equity is yours and you can do whatever you want to with it.