
FHA Cash-Out Refinance Guide
Quick Answer
If you're looking to tap some of the equity of your home, an FHA cash-out refinance could help you accomplish your goal. An FHA cash-out refinance allows you to refinance your existing mortgage into a new loan and receive the difference between your old and new loan balance in a lump-sum cash payment.

If you've built equity in your home, an FHA cash-out refinance could be a way to turn some of that value into usable cash. FHA cash-out refinances have a lower credit score requirement than conventional cash-out refinances and may offer competitive interest rates, allowing borrowers who may not otherwise qualify to access their home equity.
Whether you're planning a major renovation or want to pay off high-interest debt, it's important to understand how FHA cash-out refinances work and whether they're the right fit for your situation.
What Is an FHA Cash-Out Refinance?
An FHA cash-out refinance is a type of cash-out refinance loan backed by the Federal Housing Administration (FHA). The loan allows you to refinance your existing mortgage into a new, larger FHA loan. You then receive the difference between your old loan balance and your new one in a lump sum after closing. Additionally, you don't need to have an FHA loan to refinance with one.
Unlike home equity loans or home equity lines of credit (HELOCs), which are second mortgages, an FHA cash-out refinance replaces your primary mortgage. It can be a smart option if you want to secure better loan terms while also pulling cash out of your equity.
FHA cash-out refinances can help borrowers with less-than-stellar credit scores refinance their home at competitive interest rates. Costs can add up, however, due to their insurance requirements—so they're not always the least expensive option.
Learn more: What Is an FHA Loan?
How an FHA Cash-Out Refinance Works
Getting an FHA cash-out refinance involves a process similar to applying for a regular mortgage. Here's what to expect:
- Apply with an FHA-approved lender. You'll need to apply through a lender that offers FHA loans. They'll ask for information about your income, employment, credit history, assets and debts.
- Get a home appraisal. Your lender will order a professional appraisal to assess your home's current market value. This step is critical, as it determines how much equity you have and how much you can borrow.
- Go through underwriting. The lender reviews your financial documents and ensures you meet FHA eligibility criteria. If you pass underwriting, the loan will move forward to closing.
- Close on the loan. At closing, your old mortgage is paid off with the new loan. Any remaining funds—after closing costs and fees—are disbursed to you in a lump sum.
FHA vs. Conventional Cash-Out Refinance
One benefit of an FHA cash-out refinance is the lower credit score requirement. FHA loans typically have more flexible eligibility requirements compared to conventional loans.
FHA loans may also offer more affordable interest rates, particularly for borrowers with lower credit scores.
However, some conventional lenders may offer higher loan-to-value (LTV) limits, allowing you to borrow more. Additionally, all FHA loans come with mortgage insurance, which isn't an issue with a conventional lender as long as your LTV remains below 80%.
FHA Cash-Out Refinance Requirements
To qualify, you'll need to meet several FHA-specific requirements. Here are the main ones:
- Occupancy: You can generally only use the FHA cash-out refinance program on an owner-occupied principal residence that you've lived in for at least 12 months. The only exception is if you inherited the home and haven't used it as an investment property.
- Payment history: You must have a positive payment history for the 12 months preceding your application or since you obtained the initial loan, whichever is less.
- Credit score: You'll typically need a credit score of 580 or higher to get approved, though some lenders may have higher minimums.
- LTV: Between your original mortgage balance and the additional cash, you can borrow up to 80% of your home's value.
How Much Can You Borrow With an FHA Cash-Out Refinance?
An FHA cash-out refinance might allow you to borrow up to 80% of your home's appraised value.
Example: Let's say your home is currently worth $300,000, and you owe $200,000 on your mortgage. With an 80% LTV limit, the most you can borrow is $40,000.
Learn more: How to Calculate Home Equity
How Much Does an FHA Cash-Out Refinance Cost?
Like other mortgages, FHA cash-out refinances come with both upfront and ongoing costs. Here's what to expect:
- Closing costs: You'll pay appraisal fees, origination fees, title insurance, government taxes and other service charges. Closing costs usually range from 2% to 6% of the loan amount.
- Upfront mortgage insurance premium: FHA loans require a one-time premium of 1.75% of the loan amount. You can roll this into your mortgage if you prefer not to pay it upfront.
- Annual mortgage insurance premium: In addition to the upfront cost, you'll pay the annual mortgage insurance premium in monthly installments. The exact amount depends on your loan amount, down payment and term, but typically ranges from 0.45% to 1.05% of the loan balance per year.
Learn more: How Much Does It Cost to Refinance a Mortgage?
What Are the Interest Rates on an FHA Cash-Out Refinance?
FHA loans typically offer lower interest rates than conventional loans, especially for borrowers with less-than-perfect credit. If you've struggled to qualify elsewhere, an FHA refinance may be your best shot at securing a competitive rate.
However, when you factor in mortgage insurance, FHA loans may still cost more over time, especially if you're planning to stay in the home for many years. Conventional loans may be more cost-effective for borrowers with stronger credit and income.
Pros and Cons of an FHA Cash-Out Refinance
Before you apply for an FHA cash-out refinance loan, it's a good idea to carefully consider both the benefits and drawbacks, particularly in how they apply to your situation. Here's what to keep in mind.
Pros
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Flexible requirements: Lower credit score and income requirements can make it more accessible than conventional options.
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Assumable: FHA loans can be transferred to a new buyer, which could be a selling point if interest rates rise.
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Access to cash: There's no restriction on how you can use your funds. Pay off debt, cover medical bills or fund home improvement projects—the sky's the limit.
Cons
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Mortgage insurance premiums: You'll pay both upfront and annual premiums, which add to your total cost. With an 80% LTV, you may end up paying premiums for 11 years or longer.
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Occupancy requirement: Investment properties and second homes aren't eligible, making the program unavailable to some borrowers.
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LTV cap limits borrowing power: You can only borrow up to 80% of your home's value, which may not be enough if you need a larger cash payout.
Should You Get an FHA Cash-Out Refinance?
An FHA cash-out refinance can be a powerful tool if you're looking to tap equity but don't meet the stricter requirements of a conventional loan. It may offer the best shot at cash flow for homeowners with less-than-stellar credit or limited savings.
However, if you have great credit, you may be able to borrow more and get better terms with a conventional cash-out refinance loan. You may also consider a conventional loan if you want to avoid mortgage insurance costs.
Either way, you'll want to think carefully about your financial stability, future plans and the total cost of the loan. If your income is unstable or you're looking to minimize borrowing costs, other options may be better.
Learn more: When Should You Refinance Your Mortgage?
Alternatives to an FHA Cash-Out Refinance
If you're unsure whether an FHA cash-out refinance loan is right for you, here are some alternatives you can consider:
- Conventional cash-out refinance loan: This option offers similar functionality but may be cheaper in the long run if you qualify for better rates and don't need mortgage insurance. You may also be able to borrow more.
- Home equity loan: Considered a second mortgage, a home equity loan offers a lump sum at a fixed rate, ideal for a single large expense. It keeps your existing mortgage in place, so closing costs are applied to a much smaller balance. It may be a good fit if you've already locked in a low rate on your primary mortgage and don't want to refinance the entire loan.
- Home equity line of credit (HELOC): A HELOC works like a credit card backed by your home equity. It comes with a draw period where you can borrow as needed, followed by a repayment period. HELOCs usually offer variable interest rates, so they may not be ideal in a rising-rate environment. Still, they offer flexibility and interest-only payments during the draw period (usually 10 years) and can be great for ongoing or unpredictable expenses like renovations.
- Personal loan: Personal loans are usually unsecured, so you don't have to use your home as collateral. However, you'll likely pay a higher interest rate than you would with a home equity product, especially if your credit score is low. Consider this option for smaller loan amounts or short-term needs.
Frequently Asked Questions
The Bottom Line
An FHA cash-out refinance gives qualified homeowners a way to turn their equity into cash. It's especially beneficial for those who may not meet conventional loan requirements. Just make sure to weigh the long-term costs, including mortgage insurance, and consider your financial goals before committing.
If you want to see if you're ready to refinance and compare your options, start by checking your credit report and FICO® Score☉ for free with Experian.
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Learn moreAbout the author
Ben Luthi has worked in financial planning, banking and auto finance, and writes about all aspects of money. His work has appeared in Time, Success, USA Today, Credit Karma, NerdWallet, Wirecutter and more.
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