Learning to Calculate your FHA Home Equity

An FHA Home Equity loan uses the value of your home as collateral for financing. There are two primary types of FHA home equity loans: a streamlined refinance loan on a home purchased with an FHA mortgage and a home equity loan on a home purchased without an FHA mortgage. The size of the loan you can receive depends on which of these options you are using and other factors in your home value and loan value.

FHA Streamlined Refinance Loan

While a refinance loan is a unique form of home equity loan. Typically, the goal is not to get new cash for spending and improvements but only to reduce the cost of the current loan. For example, you can refinance to a lower interest rate in some cases once you have repaid a significant portion of your mortgage. For an FHA streamlined refinance loan, you may not even need a home appraisal or credit check. The limit of your loan will be the previously appraised value of your property. You may ask for a new appraisal to achieve higher limits. You already have an FHA home loan in good standing, and you are simply adjusting the terms. 

FHA Home Equity Loan 

If you would like to receive a home equity loan, not a refinance loan, you will need to calculate the limits of your potential loan in a different manner. The limits will be determined with a simple formula if you are using a cash-out option. The formula is more complicated if you are not cashing out a mortgage. 

Cash Out Refinance

A cash out refinance is a form of equity loan that allows you to gain extra cash by paying off your existing mortgage with a new loan in a much higher amount. The difference in limits between the two loans results in immediate cash in your pocket. In this case, you will be able to receive between 85 percent and 95 percent of your home's value on your FHA cash out refinance loan. FHA cash out refinance options are limited to older individuals who have paid off or nearly paid off their mortgages.

Standard Home Equity Loan

This circumstance is the most complicated. It applies if you are taking a home equity loan on a property not secured by an FHA mortgage. You must not be using a cash out refinance in this scenario. If this describes your situation, you may be subject to one of two ways:

  • Multiplying the home's maximum loan-to-value ratio by the home's appraised value OR
  • Totaling the original lien, junior liens and closing costs on the new loan. This calculation is more complicated, and it can involve multiple contracts on your home. 

The lesser of these two calculations will be used for your FHA home equity loan. Since this is the most complicated type of limit to calculate, it may be in your favor to contact a loan consultant to inquire about your limits. Your credit and income may come into play as well, particularly if your previous mortgage was taken more than five years ago.

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