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An FHA cash-out refinance mortgage can provide cash for debt consolidation, but it's important to evaluate the costs and possible risks of adding to home loan debt.

FHA Cash-out Refinancing and Debt Consolidation

An FHA cash-out refinance may provide an accessible option for taking advantage of lower mortgage rates and providing cash for debt consolidation. Weighing the benefits,costs, and risks of cash-out refinancing can help determine if FHA cash-out refinancing can work for you.

FHA Loan Requirements: Lower LTV Means Less Cash

The FHA recently reduced the maximum loan to value ratio (LTV) for cash out mortgage refinancing from 95% to 85% plus the up-front mortgage insurance premium and allowable costs. If you have little home equity and a lot of debt, the new FHA loan requirements may make it impossible to refinance for enough to consolidate all of your debts.

Refinancing for Larger Mortgage Amount May Increase Foreclosure Risk

A cash-out refinance can reduce finance charges on your mortgage and consumer debt, but it increases the amount of debt secured by your home, and could increase foreclosure risk. A cash-out refinance doesn't prevent future debt. If you have issues with compulsive spending, you may incur additional debt after increasing mortgage debt with a cash-out refinance. Contact a HUD approved credit counselor to learn about debt management programs and options.

Refinancing: Considering Potential Costs and Savings

Estimating how much you may save by consolidating debt through a mortgage refinance can be complicated. Here are two things to keep in mind:

  • Closing costs and mortgage insurance: Refinancing only for debt consolidation without significantly reducing your mortgage rate may not be a cost-effective solution, as refinancing costs can diminish or eliminate potential savings.
  • Breaking even on costs: Realizing savings through refinancing requires staying in your home long enough to break even on the cost of refinancing. If you plan to move within a few years, refinancing may not yield any savings.

Consulting a financial advisor can help you learn more about how cash out refinancing can assist with meeting your financial goals.

Karen Lawson
Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.