October 5, 2021
Refinancing a mortgage can have pros and cons–knowing them both can help you make a more informed choice about the type of refinance option you choose.
There are cash-out refinance loans, no-cash out, and for those with existing FHA mortgages, an FHA Streamline Refinance option that usually requires some type of benefit for the borrower.
The pros and cons of a Streamline Refinance are fairly simple.
In the “pro” column, you get something that benefits you in the form of a lower monthly payment or lower interest rate. Or you get out of an adjustable rate mortgage into a fixed-rate loan.
In the “cons” column, the biggest drawback is–depending on the term of your new loan compared to the term of your original mortgage–a renewed loan term. If you had a 30-year loan and you refinance into another 30-year loan, you’re paying longer on the home.
But for those with a priority that involves lower payments, making those payments for a while longer isn’t always as important as making the payments work within the borrower’s budget.
Cash out refinance loans have their own pros and cons. The pro for cash out refi is obviously getting money back on the transaction. However, one “con” for this type of loan is that if you haven’t owned the home for very long and don’t have much equity built up, it might not make sense to apply for cash out refinancing.
For those who DO have more equity and want to take it out in cash, FHA cash out refinancing has a plus in that you can use these loan funds for any purpose acceptable to your lender, which means you can do some home renovation using funds from your refinance.
Other types of FHA loans such as a 203(k) Rehabilitation Refinance also provide money for remodeling but the projects you can do with those 203(k) loan funds may be restricted to a set of approved uses for the money.
Not so with an FHA cash-out loan, which means you could add a “luxury feature” not permitted with an FHA 203(k) Rehab loan. Those luxury features could include a barbecue pit or swimming pool.
Not everyone who refinances wants to get cash back on the transaction, but those who do will find that the FHA cash-out refinance is the most flexible option.
FHA 203(k) Rehabilitation loans and their refinance loan counterparts don’t provide unrestricted cash back–the money can only be used for renovation projects specified in the FHA loan rulebook, HUD 4000.1.
There are many uses for an FHA refinance loan, the key is to decide what you want to use the loan to do and then find the right type of refi for you. Not every refinance option is right for a specific purpose; if you aren’t sure which option is best, talk to a loan officer to get more clarity on the right loan for the right needs.
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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