FHA loans and home equity: Understanding your options

Quick insights

• You may be able to access your equity through an FHA cash-out refinancerefinance-hl000061 with an approved lender.
• This option allows you to replace your current mortgage with a larger one and receive the difference in cash.
• Home equity loans and HELOCs can also leverage the equity you’ve built in your home, but these products aren’t offered by the FHA.

If you’re a homeowner with an FHA loan and looking to tap into your home’s equity, an FHA cash-out refinance could be an option worth considering. The FHA doesn’t offer traditional home equity loans or lines of credit (HELOCs). A cash-out refinance allows you to replace your current mortgage with a new, larger one and receive the difference in cash.

What is FHA home equity?

Home equity is the value of your home minus what you still owe on your FHA loan. The definition of home equity is basically the same regardless of the type of mortgage loan. For example, if your home is worth $300,000 and you still owe $200,000 on your mortgage, you have $100,000 in equity. If the value of your home appreciates over time, your equity will further increase. However, it ’s important to note that market conditions can affect home values, and there may be periods when home values do not increase or even decrease.

Can you use home equity to refinance an FHA loan?

Yes, you can use home equity to refinance an FHA loan. Once you’ve built enough equity, there are a few ways to refinance your FHA loan using that equity:

• FHA no cash-out refinance: This is a straightforward option that allows you to refinance your existing FHA loan into a new one. The new loan could possibly have a lower interest rate or better terms. However, you won’t receive any cash from this option.
• FHA cash-out refinance: This allows you to replace your current FHA loan with a new, larger one and take out the difference in cash. This may be worth considering if you want to use your home equity for renovations, debt consolidation or other major expenses.
• FHA streamline refinance: While this doesn’t leverage home equity, an FHA streamline refinance could reduce your interest rate or monthly payment.

Can FHA borrowers get a HELOC or home equity loan?

Yes, but not directly through the FHA. While the FHA doesn’t offer home equity loans or HELOCs, you can apply for these products offered by certain lenders if you have an FHA loan. Here’s what you need to know:

• HELOCs give you access to a revolving line of credit based on your home’s equity, similar to a credit card. You can borrow what you need, when you need it, during the draw period, then repay it over a different period. Chase offers HELOCs in select states.  Please talk with a Home Lending Advisor to see if HELOCs are available in your area.
• Home equity loans provide a lump sum, typically with a fixed interest rate and predictable monthly payments as a result. Chase does not offer home equity loans at this time.

To qualify for either loan option, most mortgage providers require at least 15-20% equity in your home, along with a solid credit score, stable income and a low debt-to-income ratio. Terms and requirements vary by loan provider.

Things to consider before using home equity

Before using your home equity to borrow or refinance, here are some financial considerations:

• Increased debt: Whether you’re refinancing or taking out a second loan, you’re adding to your overall debt.
• Costs and fees: Refinancing and equity loans often come with closing costs, origination fees and appraisal fees.
• Long-term plans: If you plan to move soon, using your equity may not be worth any upfront costs.
• Your financial goals: Using equity can help financially when conducting home improvements or consolidating high-interest debt; however, home equity products can be long-term financial commitments.

If you’re unsure whether to refinance or borrow against your equity, consider speaking with a mortgage advisor or HUD-approved housing counselor.

In summary

From lowering your mortgage payment to funding a home project or consolidating debt, home equity can open the door to new financial opportunities. While FHA loans don’t offer built-in equity loans or HELOCs, you could  still access your equity through refinancing or private lending options. As your equity grows, understanding how to use it wisely can help you build long-term financial stability and get the most of your investment in your home.