How Does an FHA Cash-Out Refinance Work?

If your home is worth more than you owe on it, you have equity. That’s the share of your home’s value you own outright.

An FHA cash-out refinance lets you turn that equity into cash without selling. It replaces your mortgage with a larger loan insured by the Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD). FHA loans can be easier to qualify for than conventional loans if you don’t have strong credit.

What is an FHA cash-out refinance?

An FHA cash-out refinance lets you borrow more than you currently owe on your existing mortgage. The new FHA-insured loan pays off your old one, and whatever’s left after closing costs goes to you.

FHA loans are offered through approved lenders, like banks, credit unions, and online lenders. The FHA covers much of the lender’s loss if you stop paying, and that lower risk is why lenders may approve borrowers with lower credit scores. The trade-off is that you pay for it through an FHA mortgage insurance premium (MIP).

Read more >> What Is an FHA Loan?

‍Paying off cards this way puts your house behind them. Credit card debt is unsecured, which means if you fall behind, your credit takes the hit. Roll it into your mortgage, and the same balance can cost you the house. You’d also be paying it off over 30 years instead of a few. A HUD-approved housing counselor can tell you whether it’s the right move for you for free at 800-569-4287.

How an FHA cash-out refinance works

• The lender reviews your finances. They check your credit, income, debts, and payment history.
• An appraiser values your home. Your new loan can’t be higher than 80% of your home’s appraised value.
• The lender decides whether to approve you. If you’re approved, you’ll get a Closing Disclosure with your final loan terms and costs at least three days before closing.
• Sign your new loan documents at closing. Closing costs come out of your loan proceeds. The upfront MIP is 1.75% of your loan amount that’s usually added to your loan balance.
• You have three business days to change your mind. Because FHA cash-out loans are for your primary home, federal law gives you this right of rescission. Your lender can’t release the cash until that window closes.
• Your old mortgage is paid off, and you get the rest in cash. That’s the amount left after your old mortgage and closing costs are paid.

Run the numbers >> Use Kikoff’s FHA calculator to estimate the payment on your new loan amount, mortgage insurance included.

How much cash can you take out?

Your new loan can be up to 80% of your home’s adjusted value. For most owners, that’s the appraised value. But if you’ve owned the home less than a year, FHA uses either the appraisal or what you paid, whatever’s lowest.

That means you’ll keep at least 20% of your home’s value as equity, before MIP is tacked on.

Say your home is worth $300,000 and you still owe $170,000 on your current mortgage:

In addition to paying an upfront MIP, you’ll pay an annual MIP as part of your monthly payment. On loans longer than 15 years at 80% of your home’s value, it’s typically 0.50% of your loan balance a year (0.70% if your base loan is over $726,200), and you pay it for 11 years. Using our example loan, that’s about $100 a month to start. Ask your lender to confirm your exact rate and how long you’ll pay it.

Read more >> Can You Refinance a Mortgage If You're Behind on Payments?

Check your county’s limit first. FHA caps loan amounts by county. HUD’s 2026 limits run from $541,287 in lower-cost areas to $1,249,125 in the most expensive ones, so the ceiling depends entirely on where the property is. Look yours up on HUD’s county limit tool before you shop.

FHA cash-out refinance requirements

Credit score

FHA allows credit scores as low as 500 on loans with at least 10% equity. Cash-out FHA loans already require at least 20% after refinancing, so 500 is the minimum. Most lenders set a higher minimum, so ask before you apply.

Equity and loan-to-value ratio

Your loan-to-value ratio (LTV) compares your loan amount with your home’s value. A $240,000 loan on a $300,000 home is an 80% LTV, the most FHA allows on a cash-out refinance. To walk away with meaningful cash, you’ll generally need well over 20% equity going in.

Payment history and seasoning

Seasoning means how long you’ve owned the home and paid on your mortgage. Under HUD’s Single Family Housing Policy Handbook, you’ll typically need to have:

• Lived in the home as your primary residence for the past 12 months
• Made at least six payments on your current mortgage
• Made every payment within the month it was due for the past 12 months or since your loan started, if it’s newer

Debt-to-income ratio

Your debt-to-income ratio (DTI) is your monthly debt payments divided by your monthly income before taxes. For manually underwritten loans, FHA’s benchmarks are 31% for housing costs and 43% for total debt. Many FHA loans go through HUD’s automated underwriting, which can approve higher ratios. LSavings or a steady job history can help either way.

Read more >> Can You Get a Cash-Out Refinance With Bad Credit?

FHA cash-out refinance vs. conventional cash-out refinance

Both loans let you borrow up to 80% of your home’s value. The biggest differences are who qualifies and what you’ll pay for mortgage insurance.

Read more >> How to Remove PMI From an FHA Loan

Pros and cons of an FHA cash-out refinance

FHA loans tend to have looser credit requirements than conventional ones, but that flexibility costs money.

✅ Pros

• Often easier to qualify for with lower credit
• Rates often more competitive than those for conventional loans
• You can refinance almost any type of mortgage into an FHA loan

❌ Cons

• Upfront and annual mortgage insurance add to your cost
• A larger loan stretched over a 30-year term can raise your monthly payment and total interest
• Closing costs of 3% to 6% of the loan come out of your cash
• Your home secures the loan, so falling could lead to foreclosure

Read more >> How to Lower Your Monthly Mortgage Payment

When an FHA cash-out refinance makes sense

An FHA cash-out refi can be a good fit if you have solid equity, a steady payment record, and credit that doesn’t yet qualify you for a conventional loan. It’s worth rethinking if you only need a small amount, your current rate is lower than today’s rates, or you could cover costs another way.

Read more >> How to Reduce Closing Costs When Buying a Home

‍3 questions to ask before you tap your equity

1. What will closing costs and mortgage insurance cost me?
2. Is my new rate higher than my current one?
3. Could I keep up if my income dropped?

If those answers are hard to weigh, a HUD-approved housing counselor can walk through the numbers with you for free or at low cost. The National Foundation for Credit Counseling (NFCC) also offers free or low-cost counseling at 800-388-2227.

Bottom line

An FHA cash-out refinance can turn equity into cash when your credit rules out other options, but you’ll pay mortgage insurance for it, and your home secures every dollar of the loan.

Mortgage insurance is the price FHA charges for flexibility on credit. Stronger credit gives you more loans to choose from, and some skip that premium entirely. A Kikoff Credit Account adds on-time payments to all three credit bureau reports, with no credit check to sign up. Plans start at $5 a month.