Want to tap your home equity? If you have an FHA loan, the amount you can access just shrunk.
“Refinancing your mortgage to take cash out using your home’s equity may not be as easy to do under new limitations on cash-out refinances released by the Department of Housing and Urban Development,” said Realtor Magazine.
The previous loan-to-value (LTV) limit on cash-out refinances was 85%; effective for loans on or after September 1, 2019, HUD is lowering the requirement to 80%. This change “seeks to mitigate risks…associated with increasing levels of insured loan balances on cash-out refinance mortgages,” said HUD in a Mortgagee Letter announcing the change. “This new requirement is a prudent safeguard that permits FHA to ensure it stays ahead of any shift in housing stability.”
The last time HUD adjusted the max LTV for cash-out refinances was back in 2009, when they set the current benchmark of 85% “in response to the weakening housing market” and in recognition of a rapid increase in “the share of cash-out refinances…as housing prices increased through the mid-2000s. Subsequent studies have shown that a significant increase in foreclosures may have been the result of a high number of cash-out refinances completed prior to the collapse of the housing market,” they said. Prior to that shift, homeowners could tap up to 95% of their home equity.
The letter also noted that FHA cash-out refinances have swelled by more than 250% from 2013 to 2018, HUD reported. There were more than 150,000 of these transactions last year. “Cash-out refinances comprised 64% of all FHA-insured refinance transactions, up nearly 39% from the year prior,” said Realtor Magazine. “The increase in home prices has prompted more cash-out refis, according to the annual Report to Congress issued last fall.”
Cash-out refinances are a popular option among homeowners whose houses have appreciated because, while rates vary depending on many factors including the strength of the borrower’s credit, the money is often less expensive than in other types of lending. And, if the money is used for smart updates or improvements, it can increase the home’s value and provide some safeguards should there be market adjustments.
“This option can be beneficial to consumers who have seen the value of their home rise in recent years,” said Bankrate. While many financial experts caution against taking too much money out of your home—and this move by the FHA is intended to help keep owners from ending up under water—“Taking the money from the cash-out refi and putting it towards paying down high-interest debt or home repairs can be a financially sound decision.”