The Quick Read: Both loan types can pay off your cards, and the better pick usually comes down to your credit score and your debt ratio. Conventional cash-out tends to cost less over time if your credit is strong. FHA tends to fit when your score is mid-range or your debts crowd your income. Either way, you are swapping unsecured card debt for debt secured by your home.
Here is the honest version. If your credit is solid and your ratios are comfortable, conventional is usually the cheaper path. If your credit has dents or your debt-to-income ratio is tight, FHA may be the one that gets approved. Neither loan is “better” in the abstract. They are built for different borrowers.
Lendmire’s team sees this choice often. Lendmire is a mortgage broker, so it does not lend. It compares programs across wholesale lenders, and the decision usually turns on four things: your score, your ratios, your equity and how long you will keep the loan.
Side-by-Side
The table below covers the one-unit, owner-occupied home. Program figures are subject to lender guidelines and full file review. Nothing here is a commitment to lend.
| Factor | FHA Cash-Out | Conventional Cash-Out |
|---|---|---|
| Maximum leverage | 80% LTV | Similar on one unit; lower on 2-4 units |
| Credit floor | Programs start at a 580 score | Generally higher than FHA |
| Mortgage insurance | 1.75% upfront plus annual premium | Generally none at or below 80% LTV |
| Occupancy | Your principal residence only | Primary, second home or rental; caps differ |
| Ratios | 31/43 base; up to 40/50 with factors | Automated findings; reserves may apply |
| Home history | Owned and lived in 12 months | Existing loan seasoned; time on title |
LTV means loan-to-value: the new loan as a percentage of the appraised value. The 580 figure is the floor on the wholesale programs Lendmire places FHA loans with. Some lenders set a higher bar.
The FHA column’s mechanics are covered in detail on Lendmire’s FHA cash-out refinance program page.
How a Cash-Out Pays Off Your Cards
A cash-out refinance replaces your current mortgage with a new, larger one. The difference between the new loan and your old payoff, minus closing costs, becomes cash. Cards are one allowed use of that cash.
The sequence is simple:
1. An appraisal sets your home’s value.
2. The lender applies the LTV cap to that value.
3. The old mortgage and costs come out first.
4. What remains can pay your card balances.
Many lenders pay the card issuers directly from the closing proceeds. That matters because a card paid off at closing generally stops counting toward your debt ratio. A card left open with a balance still counts.
Here is a quick picture in percentages. Say your current mortgage is 60% of your home’s value. An 80% cap leaves a 20% slice of value for costs and cards. On FHA, the 1.75% upfront premium is added to the loan, so it takes a bite out of that slice. Your actual cash is lower than the cap suggests.
That is why the cap is a ceiling, not a payout. The existing loan, costs, ratios and credit all limit the cash you receive.
When Conventional Is the Better Fit
Conventional usually wins when your credit is strong and your ratios are tidy. The main reason is mortgage insurance. At or below 80% LTV, conventional cash-out generally carries none. FHA always charges the upfront premium and an annual premium on top.
The annual FHA premium runs between 0.15% and 0.75% of the balance. It depends on term, loan amount and LTV. On the wholesale programs Lendmire places, a thirty-year loan at or below 90% LTV sheds that premium after eleven years. Above 90% LTV it lasts the whole term. Cash-out tops out at 80%, so the eleven-year version is the one that applies. Even so, you pay the premium for a long stretch. A stronger-credit borrower who plans to keep the loan for many years often pays more with FHA than with conventional.
Conventional also fits if you are not sure FHA’s occupancy rule works for you. FHA cash-out is for the home you live in. Conventional rules extend to other property types, at lower leverage caps.
Timing is the catch. Fannie Mae’s Selling Guide generally wants your existing first mortgage to be at least a year old. At least one borrower must have been on title for about six months. A property that was listed for sale generally must be off the market by closing. Higher debt ratios can also trigger a reserve requirement, meaning cash left in the bank after closing.
Conventional also tends to ask more of your credit file.
Conventional is likely your lane if:
- Your credit score sits comfortably above the FHA floor
- Your ratios clear the automated review without compensating factors
- You expect to hold the loan for a long time
- Your existing mortgage and time on title meet the seasoning tests
When FHA Is the Better Fit
FHA fits when your credit is mid-range, or your debts are heavy for your income. The ratio rules show why. The base pair is 31/43, meaning housing cost is 31% of income and total debt is 43%. With documented compensating factors, such as reserves or a strong payment record, a file can reach 40/50 at the top tier. The automated finding governs most files.
Card balances usually drive that total-debt number. Paying the cards at closing removes their minimums from the ratio. The new, larger mortgage payment takes their place, so the lender tests that payment instead. On a high-ratio file this can be the difference between a yes and a no.
FHA also asks for a clean mortgage history. HUD requires that every mortgage payment in the last twelve months was made within the month due. Credit cards can be messy, but your mortgage cannot be. After a COVID-era forbearance, HUD asks for twelve consecutive payments before a cash-out.
Two more FHA rules trip people up:
- The ceiling is 80%. HUD lowered the FHA cash-out cap to 80% from an older, higher limit. Old web pages still quote the higher number.
- Income has limits. A non-occupant co-borrower’s income cannot be used to qualify for a cash-out. Rent from an accessory unit on a one-unit home cannot be counted either.
The cost is the premium. HUD sets the upfront premium at 1.75% of the base loan, and most borrowers finance it. Financing it adds to the balance you will carry for years. Confirm current premium details with your loan officer, since HUD updates its schedules.
FHA is likely your lane if:
- Your score is in the mid-range rather than the high range
- Your cards push total debt near the limit
- Your mortgage payments for the past year were all on time
- You live in the home and have for at least twelve months
A Credit Score Note
Credit score effects run in two directions. Paying off revolving balances can lift your score because your card utilization drops. The CFPB found that borrowers saw a sharp initial improvement that then gradually eroded, though scores stayed above pre-refinance levels. The same report warns that paying non-mortgage debt with mortgage debt can raise foreclosure risk.
The cards do not vanish. They are paid off, not erased. If the balances creep back up, you carry both the new mortgage and fresh card debt. That is the real hazard of this strategy, and no loan type fixes it.
When Neither One Fits
A cash-out can be the wrong move. Consider other paths if:
- You plan to sell or move soon, so closing costs have little time to pay off
- Your card balances are small compared with the costs of a new mortgage
- Your current mortgage terms are strong enough that replacing the loan would hurt more than help
- You suspect the cards will fill up again
A nonprofit credit counselor can set up a repayment plan that does not touch your house. A balance transfer or a personal loan keeps the debt unsecured. These carry their own costs and limits, so compare them against the cash-out with the same care.
One more point on equity. Lenders typically expect you to keep a cushion, often 10% to 20% of your home’s value, according to the CFPB’s home equity guide. Equity you spend on cards is not there later for repairs or emergencies.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Key Terms Defined
Cash-out refinance: A new mortgage that replaces your current one and hands you part of your equity as cash.
LTV (loan-to-value): Your loan balance divided by your home’s appraised value.
DTI (debt-to-income): Your monthly debts divided by your monthly gross income.
Mortgage insurance premium (MIP): FHA’s insurance charge, paid once upfront and then yearly. It protects the lender, not you.
Seasoning: The waiting period a loan or ownership must meet before you can refinance.
The Balanced Verdict
Choose conventional if you have the credit, the seasoning and the comfortable ratios. It usually costs less to carry because it generally skips mortgage insurance at 80% LTV. Choose FHA if your credit or debt load keeps conventional out of reach. You accept mortgage insurance in exchange for broader qualification.
If you land near the line, run both. The cheaper loan on paper is the one that you qualify for and can keep paying.
Frequently Asked Questions
Can an FHA cash-out refinance pay off credit cards?
Yes. Cash-out proceeds are not limited to specific purposes, so card payoff is allowed. Lenders commonly pay the card issuers directly at closing. Approval depends on your credit, ratios, equity and payment history, all subject to lender guidelines.
Do I need an FHA loan already to get an FHA cash-out?
No. You do not need an existing FHA loan. You do need to own and live in the home for twelve months before the case number is assigned. A different product, the FHA Streamline, only applies to existing FHA loans and does not provide cash out.
Do I have to close the cards after they are paid off?
Not necessarily. Under Fannie Mae’s conventional guidance, a card paid off at closing can stay open and still drop out of your debt ratio. Confirm how your lender treats it on an FHA file. Keeping a paid-off card open only helps if you do not run it back up.
Does a lower monthly payment mean I save money?
Not automatically. Stretching card debt across a long mortgage term can lower the monthly bill while raising the total cost over time. Mortgage insurance on FHA adds to that. Compare total cost over the years you expect to keep the loan, not just the monthly figure.
How much cash can I actually get?
Less than the cap suggests. Take the cap times your appraised value, then subtract your current payoff, closing costs and any financed premium. What remains is available for the cards. A low appraisal shrinks that number.
If You Are Weighing This Decision
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.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Selling Guide B2-1.3-03
2. HUD Mortgagee Letter 2020-30
3. HUD Handbook 4000.1 Update 7.5 transmittal
4. HUD Mortgagee Letter 2017-07
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: Can You Refinance Out of FHA With a Conventional Cash-Out Refinance? · Is an FHA Cash-Out Easier to Qualify for Than a Conventional Cash-Out? · FHA and Conventional Cash-Out Requirements Side by Side for a Primary Home
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- 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.