The Quick Read: Total cost over the time you will hold the loan decides which equity option wins, not the monthly payment. An FHA cash-out replaces your whole first mortgage, adds a new upfront insurance premium, and resets your term. A second lien leaves your first mortgage alone and charges the new rate only on the new money. Which one costs less depends mostly on your current rate, how much cash you need, and how long you will keep the home.
What Is an FHA Cash-Out, and What Counts as an Alternative?
An FHA cash-out refinance is a new first mortgage, insured by the Federal Housing Administration, that pays off your old loan and hands you the leftover equity as cash. The cash can go to anything: repairs, bills, tuition, a down payment on something else. Lenders do not limit the use the way a no-cash-out refinance limits it.
The FHA cash-out refinance program reaches up to 80% of your home’s appraised value. It is for a home you own and live in. You must have owned and occupied it for 12 months before the case number is assigned. A case number is the identifier the lender pulls from HUD when the file starts.
So what are you comparing it against? Here are the realistic alternatives:
- A conventional cash-out refinance. Same structure, different loan type, different insurance rules.
- A home equity loan. A second mortgage with a lump sum and a fixed payment.
- A HELOC. A home equity line of credit. It works like a credit card secured by your house.
- A no-cash-out FHA refinance. Useful if the real goal is a lower payment, not cash.
- Non-mortgage options. Personal loans, or paying for the need out of savings.
Each one has a different effect on your existing mortgage. That single fact drives most of the cost difference, so keep it in front of you for the rest of this piece.
How an FHA Cash-Out Is Underwritten, Step by Step
Knowing how the loan is built helps you see where its costs come from. Here is the sequence across the wholesale programs Lendmire places FHA files with.
Step 1: The eligibility gate. The home must be your principal residence, and you must have owned and lived in it for the 12 months before the case number. The payment history on the current loan gets reviewed. Late payments in recent months can stop a file. A past forbearance can add waiting requirements, so tell your loan officer about it up front.
Step 2: The appraisal sets the ceiling. An appraiser values the home. The program then caps the new loan at 80% of that value. This is a ceiling, not a promise. If the appraisal comes in low, your ceiling drops with it.
Step 3: Sizing the new loan. The new first mortgage has to cover four things:
1. The payoff of your existing mortgage.
2. Closing costs and prepaid items, such as the first bit of interest and escrow deposits.
3. The upfront mortgage insurance premium, which is 1.75% of the base loan and is usually financed into the balance.
4. The cash you want.
Whatever room remains under the 80% ceiling after the first three items is your cash. That is why 80% of value does not mean 80% of your equity in your pocket. A homeowner with a large existing balance may find the cash small once everything is paid.
Step 4: Underwriting the file. The lender reviews credit, income, and the full new payment. The wholesale programs Lendmire works with start at a 580 decision score. Debt ratios, meaning housing cost and total debts against income, start at 31/43 with no extra support. Documented strengths such as cash reserves or a low payment increase can stretch a strong file to 40/50. An automated finding governs most files. All of this is subject to lender guidelines and a full file review.
Step 5: Disclosures. You receive a Loan Estimate early and a Closing Disclosure before signing. These are the documents you will use to compare, and a later section shows which lines to read.
Build the Total-Cost Method First
Compare payment alone and you will pick wrong. A longer term or a bigger balance can shrink a payment while raising what you pay over time. Use six cost lines for every option.
1. Upfront cost. For FHA: the upfront premium plus normal first-mortgage closing costs. For a second lien: often lighter, though some charge application, appraisal, or annual fees.
2. Monthly cost. For FHA: the new rate on the entire balance, plus the annual insurance premium. For a second lien: your existing first payment stays the same, and you add a second payment.
3. The fate of your current rate. A cash-out gives it up. A second lien keeps it.
4. Term reset. A cash-out usually restarts a 30-year clock. The CFPB notes that your balance falls more slowly on a longer term, even when the payment looks smaller.
5. Rate-change risk. Fixed-rate loans hold steady. HELOCs generally move with an index.
6. Your holding period. How many years you will keep the loan or the home.
Line six is the one most comparison pages skip. Upfront costs are a fixed price you pay once. Rate differences are paid every month. A short holding period favors the lower-upfront option. A long one favors the lower ongoing cost. The break-even point lies somewhere between, and your Loan Estimate gives you the inputs to find it.
What Does FHA Mortgage Insurance Do to the Total?
The upfront premium is 1.75% of the base loan. Most borrowers finance it, which means you pay interest on it for as long as you keep the loan. HUD’s Mortgagee Letter 2023-05 sets out the premium schedule. A few older FHA streamline cases are exempt, but a cash-out is not among them.
The annual premium is billed monthly. It ranges from 0.15% to 0.75% of the balance depending on term, loan amount, and loan-to-value. Because a cash-out tops out at 80% LTV, it falls in the group where the premium ends after eleven years rather than lasting the whole term. HUD’s FHA Connection page confirms the rule for case numbers assigned on or after June 3, 2013: the final premium date is eleven years from endorsement or the maturity date, depending on the loan. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
Two cautions. First, home-value growth does not cancel the premium early on these loans, so “drops off at 20% equity” is a myth for newer FHA mortgages. Second, a new cash-out starts a new clock. If you already paid FHA premiums for six years on your current loan, those years do not carry over.
A second lien behind an existing FHA first mortgage avoids a new upfront premium, because the first loan stays in place. Your current annual premium schedule just continues. The catch: FHA limits the total debt against the home when a second lien is added, and the limit is tight. Confirm it with your loan officer before assuming the structure works.
Side by Side: The Options in One Table
| Factor | FHA cash-out | Conventional cash-out | Home equity loan | HELOC |
|---|---|---|---|---|
| Your first mortgage | Replaced | Replaced | Kept | Kept |
| Rate applies to | Whole balance | Whole balance | New money only | Drawn amount only |
| Rate type | Fixed available | Fixed available | Usually fixed | Usually variable |
| Upfront insurance | Yes, 1.75% | Depends on LTV | No | No |
| Payments | One | One | Two | Two |
| Access to cash | Lump sum | Lump sum | Lump sum | Draw as needed |
Conventional cash-out insurance rules and credit standards differ from FHA’s, and VA cash-out exists for eligible veterans. The right comparison for those is a separate Loan Estimate, not a guess. A conventional file generally needs stronger credit. FHA tends to suit borrowers whose credit or ratios sit in the middle.
One Homeowner, Four Options
Take a homeowner whose first mortgage balance equals 60% of the home’s value. The homeowner wants cash equal to 10% of the home’s value for a renovation and plans to stay for many years.
FHA cash-out. The new loan would be about 70% of value before costs and the financed premium. That is under the 80% ceiling, so the cash fits. But the new loan replaces the entire existing mortgage, including the 60% that used to sit under the original terms. Total interest over the years rises on the whole balance, not just the 10%.
Home equity loan. The 60% stays under its original terms. Only the 10% is borrowed on the new second loan. The cost is a second payment and typically a shorter term, which means a bigger payment on that slice. The total-cost picture often looks better here, particularly when the cash is a modest share of the home’s value.
HELOC. Same logic on the first mortgage. The line is variable, so total cost depends on where the index goes. It may include annual fees even when the line sits unused. And if you sell, you generally have to pay it off at once. Good for staged spending, less good for a fixed, known bill.
No second loan. If savings can cover part of the work, the borrowed share shrinks and every option gets cheaper.
Run this same homeowner with the opposite starting point. Suppose the current rate is higher than what a new loan costs. Now the cash-out replaces expensive money with cheaper money, and the blended math flips. That is the pivot point: your existing rate versus the new rate. If yours is lower, test a second lien first. If yours is higher, the cash-out earns serious consideration.
The way to compare is to find the weighted-average rate. For a second lien, weight your old rate by the share of value it covers and the new rate by its share. Compare that blend with the single new rate on the cash-out loan, then add the cost lines above. Ask your loan officer for both scenarios in writing.
Where the General Rule Breaks
The rule of thumb says a second lien wins when you hold a low rate. It has exceptions.
The second-lien limit. FHA caps the combined debt, and a second lien behind an FHA first may not fit within it. If the structure is not allowed, the comparison ends before it starts.
The very large cash need. When you need more cash than a second lien can supply within the limits, a cash-out may be the only single product that reaches it.
Debt consolidation. The CFPB reports that a cash-out takes the place of the original mortgage, while home equity loans and HELOCs leave it intact. Its research also finds that more than half of cash-out borrowers in the years it studied cited paying off bills or debts. Paying off cards with equity can make sense when the cost of the new mortgage money, interest plus fees, is lower than the cost of carrying that debt. But you are turning debt that cannot take your home into debt that can. Weigh that risk, not only the math.
A recent purchase. If you bought the home within the past 12 months, an FHA cash-out is generally off the table. Alternatives may still be available.
Late payments and past forbearance. Both can block an FHA cash-out until the history cleans up. A no-cash-out option or a waiting period may fit better.
Thin equity. If the 80% cap leaves little cash after payoff and costs, the upfront premium and closing costs may eat much of what you receive. Weigh cost against the net amount, not the headline.
Non-occupant co-borrowers. FHA cash-out is for owner-occupants. A co-borrower who does not live in the home generally cannot join a cash-out.
A rental or second home. Occupancy decides leverage. FHA is a principal-residence program, so a home you do not live in belongs to different financing entirely.
County loan limits. FHA loan limits are set by county and change every year. They apply to the first mortgage and any added liens, so confirm yours.
Read the Loan Estimate Like a Comparison Sheet
Once you have quotes, the CFPB’s Loan Estimate guidance says to request Loan Estimates for the same kind of loan and compare origination charges. For a second lien, ask for the estimate for that product too, and compare lines against each other.
Use three measures together, because each hides something:
- APR rolls the interest rate and certain fees into one yearly figure. On a HELOC, the APR reflects the interest rate alone, so costs must be compared separately.
- Total Interest Percentage (TIP) shows the interest you would pay over the full term as a share of the loan. The CFPB explains that it sits on page 3 of the Loan Estimate, assumes you keep the loan for the entire term, and leaves out upfront fees. A loan can show a lower TIP and still cost more in fees.
- Cash to close and the five-year cost line show what you pay up front and what the first five years total.
A checklist before you decide:
1. Get the same-amount quote for each option.
2. Note whether the upfront premium and closing costs are financed or paid in cash.
3. Compare the net cash you receive, not the amount borrowed.
4. Find the break-even year against the option you are leaning toward.
5. Ask what happens to your payment if the index moves, for any variable option.
6. Ask whether a second lien is allowed under the combined-debt limit.
And if you have seen “no-cost” refinance ads, Lendmire’s explainer on who offers a no-cost cash-out refinance shows where those costs actually go: into the rate or the balance.
Misconceptions Worth Dropping
- “The lowest advertised rate means the most affordable loan.” It is one input. Fees, term, and insurance move the total.
- “A cash-out refinance just adds to my existing loan.” It is a new loan with a new rate, term, and insurance clock on the entire balance.
- “A HELOC costs less.” That depends on the details: its rate moves, it can carry fees, and it generally comes due when you sell.
- “Paying off debt with equity carries no added risk.” It can add risk, since the home now secures what was previously unsecured.
When Each Option Tends to Win
- Low current rate, modest cash need: test a home equity loan or HELOC first.
- Current rate higher than new loans, or a large cash need: an FHA or conventional cash-out deserves a real look.
- Cash needed in stages, comfortable with rate movement: a HELOC can fit.
- A single known expense and a wish for a fixed payment: a home equity loan.
- Credit or ratios that rule out conventional: FHA may be the practical route.
- Plans to sell soon: favor the lowest upfront cost. A cash-out rarely earns back its costs in a short stay.
Non-cost factors break ties after the math: payment predictability, how many payments you want to track, and how much risk you want against your home.
What the Decision Looks Like in Practice
Start with your current rate and balance. Decide how much cash you actually need, not the most you can get. Put the six cost lines side by side. Then pick the option whose total cost over your real holding period is lowest and whose risks you can live with.
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. Program figures are subject to lender guidelines and a full file review, and nothing here is a commitment to lend.
Key Terms Defined
Cash-out refinance: A new first mortgage that pays off the old one and gives you part of your equity as cash.
Loan-to-value (LTV): The loan balance as a percentage of the home’s appraised value.
Upfront mortgage insurance premium (UFMIP): A one-time FHA charge of 1.75% of the base loan, usually financed into the balance.
Annual mortgage insurance premium: A yearly FHA charge, billed monthly, that runs for eleven years or the loan term depending on LTV.
Second lien: A loan, such as a home equity loan or HELOC, that sits behind your first mortgage.
HELOC: A home equity line of credit. A revolving line secured by your home, usually with a variable rate.
Total Interest Percentage (TIP): The interest you would pay over the loan’s full term, shown as a percentage of the loan amount.
Blended rate: The weighted average of two rates when you keep a first mortgage and add a second lien.
Frequently Asked Questions
Is an FHA cash-out cheaper than a HELOC?
It depends on your current rate and how much you borrow. A HELOC leaves your first mortgage in place, so a low existing rate keeps working for you. An FHA cash-out puts the new rate on the entire balance and adds the upfront premium. When the cash need is small relative to your balance, a HELOC often costs less in total, though its variable rate and fees can change that.
Can I keep my low rate and still get cash from an FHA loan?
Usually not through a cash-out, because it replaces the first mortgage. A second lien keeps your first loan. If that first loan is FHA, combined-debt limits apply, so confirm the structure fits before you plan around it.
How long do I pay FHA mortgage insurance on a cash-out?
Because a cash-out is capped at 80% LTV, the annual premium falls in the group that ends after eleven years for case numbers assigned on or after June 3, 2013. Equity growth does not end it sooner. A new cash-out starts a new premium clock. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
What happens if I sell soon after a cash-out?
You pay off the new loan from the sale, but you may not have held it long enough to earn back the upfront premium and closing costs. The same goes for a HELOC, which generally must be paid off when you sell. Short holding periods favor the option with the lowest upfront cost.
Does an FHA cash-out make sense for paying off credit cards?
It can, if the cost of the new mortgage money is lower than the cost of carrying the debt. The tradeoff is that unsecured debt becomes debt secured by your home. Consider whether the new payment is sustainable before choosing it.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
For the program’s current guidelines, see FHA loan programs.
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References
1. CFPB
2. HUD Mortgagee Letter 2023-05
3. HUD FHA Connection: mortgage insurance final date
4. CFPB Office of Research: cash-out refinance mortgages and their borrowers
5. CFPB: Loan Estimate explainer
6. CFPB: What is the Total Interest Percentage (TIP)?
This article is part of Lendmire’s FHA Loan series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Refinancing An FHA 203(k) Loan After The Renovation Is Done · FHA Simple Refinance Vs FHA Streamline: The Appraisal Makes The Difference · FHA Cash-out Refinance Credit Requirements: The Floor And The Overlays Above It
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.