Like any type of cash-out refinance, a Federal Housing Administration (FHA) cash-out plan lets you refinance your old mortgage with a new loan amount that’s larger than your current balance. The new loan includes some of the equity accrued in your home. At closing, when the new loan amount pays off the prior loan amount, you receive a check for the difference (the equity). This can be used for debt consolidation, renovations, college tuition or any other major expense while paying the larger loan amount.
You don’t need to have an FHA loan to qualify for an FHA cash-out refinance; you can transition from a conventional loan. The biggest difference between an FHA cash-out refinance and a conventional one is that the government backs the FHA loan. As a result, lenders are more relaxed with qualifications, and homeowners with lower credit scores (at least 500, though 580 is preferred) are eligible. If today’s interest rates are lower than the existing rate on your mortgage, a cash-out refinance could lower your interest costs in the long run. But FHA cash-outs come with additional costs, like mortgage insurance premiums and another round of closing expenses. So, it may not be the right move for everyone.
If you’re considering an FHA cash-out refinance, here’s what you need to know before you apply.
Key Takeaways
- An FHA cash-out refinance lets you convert home equity into cash with a new, larger mortgage with new terms and interest rates.
- You don’t need an FHA mortgage loan to refinance with the FHA’s cash-out program.
- Credit score requirements are more lax compared to conventional cash-out refinances.
- You must meet residency requirements and have a history of on-time mortgage payments to qualify.
- A home equity loan or home equity lines of credit (HELOC) could be a good alternative to an FHA cash-out.
How Does The FHA Cash-Out Refinance Program Work?
An FHA cash-out refinance is a way for existing homeowners to access some of their home equity without having to sell their property. Unlike a home-equity loan, the FHA cash-out refinance replaces your existing mortgage with a new loan with a new interest rate.
What Is The FHA Cash-Out Plan?
The FHA cash-out refinance converts home equity into cash by replacing your existing mortgage with a new, larger loan. Part of the new loan pays off your current mortgage balance, and the remainder is yours to use for almost anything – renovations, tuition, you name it. There are a number of cash-out refinance options to choose from, but because the FHA cash-out program is insured by the government, it has flexible credit requirements, making it easier to qualify even if you’ve been turned down for a conventional refinance.
How Does The FHA Cash-Out Program Work?
With an FHA cash-out refinance, you apply for a new mortgage to replace your old one. You’ll get a fresh loan interest rate and terms based on your credit, income and current market conditions. You can apply with your existing lender or a new one, as long as the lender is FHA approved. You must get an appraisal on the property to verify the home’s market value. Once you close, the new loan pays off your previous mortgage balance in full, and then you’ll start making payments on the new mortgage.
The difference between an FHA cash-out refinance and a traditional refinance is that the FHA insures its loan, so it’s easier to qualify. Both increase your loan balance so you can borrow extra cash. Typically, you can borrow as much as 80% of your home’s current value – you must maintain at least 20% equity in the home.
Taking out a larger loan can mean higher payments and extra costs (new closing costs and mortgage insurance premiums). In some cases, it could mean more interest paid over time. Since the FHA cash-out is a new loan, you’ll want to compare current interest rates with the rate you have on your existing mortgage. If interest rates are higher now, it might make more sense to keep your existing mortgage and take out a home equity loan or a home equity line of credit (HELOC). You’ll still be borrowing against your home equity, but you’ll pay the higher interest on a much smaller amount.
There’s also upfront and annual mortgage insurance premiums (MIP) to consider, as they add to closing costs and your monthly payments. An FHA cash-out refinance requires you to pay an upfront MIP of 1.75% of the new total loan amount and an annual MIP of 0.5% of your loan amount. The duration of your annual MIP depends on your loan-to-value ratio at origination: if your LTV is above 90%, MIP remains for the life of the loan; if your LTV is 90% or less, it lasts 11 years. Still, if conditions make sense, an FHA cash-out refinance can be a way to use your home equity to finance a major expense.
FHA Cash-Out Refi Example
Let’s take a look at a hypothetical cash-out refinance situation. Say you purchased a home for $300,000 with a 3.5% down payment. Your starting mortgage balance would be $289,500. After 5 years of making payments, your mortgage balance will be $261,000. During that time, let’s say your property value rises to $365,000, which would bring your equity to $104,000.
You could tap into the equity with an FHA cash-out refinance. Assuming you qualify to make the payments, you could borrow up to 80% of the home’s value, totaling $292,000. After paying off the original loan balance of $261,000, you could receive $31,000 in cash, minus the upfront MIP (1.75% of the loan amount) and closing costs.
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FHA Cash-Out Refinance Requirements
The FHA cash-out plan isn’t restricted to homeowners with a current FHA loan. You can apply with any type of mortgage, such as a conventional or USDA loan, but you and the property must meet certain requirements in order to qualify.
- Credit score: The minimum credit score for any FHA mortgage is 500, but individual lenders may require a score of at least 620 for a cash-out.
- Length of residence: You must have lived in the property you’re refinancing for at least 12 months, unless you inherited the home.
- Payment history: You need to have at least 12 consecutive months of on-time mortgage payments in order to qualify.
You must also meet your lender’s income-related requirements, such as debt-to-income ratio (DTI); in most cases, it needs to be lower than 43%. This helps ensure you don’t borrow more than you can afford to pay back, even if you have substantial equity in your home.
FHA Cash-Out Refinance Loan Limit Guidelines
FHA loans, including cash-out refinances, come with maximum loan limits that change every year. In 2026, the maximum loan for most areas of the U.S. is $541,287 for a one-unit property. In parts of the country that are designated as high-cost areas, the maximum is $1,249,125. Regardless of your current property value and equity, you can’t borrow more than the FHA limit for your county or city.
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How Much Equity Can You Access With An FHA Cash-Out Refinance?
Loan-to-value ratio (LTV) is an important factor in getting approved for the FHA cash-out plan. It measures the amount of equity you have in the home, and that determines, in large part, how much is available for borrowing. This ratio is calculated by dividing the loan amount by the home’s appraised value, then multiplying by 100 to get a percentage. It looks like this:
(Loan amount / Appraised value) x 100 = LTV %
The LTV must be 80% or less when calculating your maximum loan amount for an FHA cash-out refinance.
Also remember to factor in closing costs, which will be deducted from your cash-out balance. These range from 3% – 6% of the loan amount.
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Advantages And Disadvantages Of FHA Cash-Out Refinances
Before you jump into an FHA cash-out plan, weigh the pros and cons to make sure it’s a good fit. Consider how much you owe on your existing mortgage, your current interest rate and why you need the money.
| Pros: | Cons: |
|---|---|
| You access cash with lower interest rates compared to credit cards or personal loans. | It increases your total debt, as you’re borrowing more than you currently owe, which means it could take longer to pay off your mortgage. |
| The money borrowed against your home equity can be used for any purpose – renovations, paying off credit card debt, school tuition. | It reduces your equity in your home, essentially converting an asset into debt and positioning you to make less of a profit in a home sale. |
| You have one loan payment to make every month, making bill paying easier. | It adds mortgage insurance premiums to both your closing costs and monthly payments – increasing what you owe each month without reducing your principal any faster. |
| Eligibility requirements are typically more flexible than they are with conventional loans (loans not insured by the government). | You’ll have to pay closing costs again. |
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FHA Cash-Out Refinance Alternatives
It’s smart to explore all of your options if you’re tapping into your home equity. Here are some alternatives to consider.
- Conventional cash-out refinance: A conventional cash-out refinance isn’t federally insured, so lenders tend to have stricter credit requirements – a minimum credit score of 620, an LTV of 80% and a DTI under 43%. If you qualify, you’ll have to pay private mortgage insurance if your equity is less than 20%, but unlike an FHA loan, the MIP automatically drops off once you reach that 20% threshold.
- Home equity loan: A home equity loan is a one-time lump sum you borrow against your home equity. Also called a second mortgage, it’s a separate, fixed-rate loan alongside your existing mortgage. It’s a good option when you don’t want to change the terms or interest rate of your current home loan, as it doesn’t interfere with your mortgage.
- HELOC: A HELOC is a line of credit that allows you to tap into your home equity without disturbing your current mortgage. Unlike a home equity loan,a HELOC is a line of credit you can borrow from throughout a draw period, which usually lasts 10 years. You can borrow from it when needed throughout that 10-year stretch. During that time, you’ll make interest-only payments before entering the repayment period.
FAQ
The Bottom Line: Accessing Home Equity With An FHA Cash-Out Refinance
When you have a major financial goal or large upcoming expense, an FHA cash-out refinance can help get you the cash you need. It can be a great option when current interest rates are lower than your existing mortgage. Plus, unlike other options, you can enjoy more flexibility when it comes to credit qualifications, while still borrowing up to 80% of your home’s value. But there are extra costs – mortgage insurance premiums and new closing expenses. So, when deciding if it’s the right move for you, look at how much you owe on your current mortgage, your existing payment and interest rate, and when and why you need the extra cash.
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Lauren Ward
Lauren Ward is a writer with over a decade of experience covering financial topics for businesses and publications. Her work has also been featured in major publications such as U.S. News and World Report, CNN, Business Insider, The New York Post and Bankrate. Her expertise includes real estate, mortgages, small business, insurance and more.
