Does Leaving FHA for a Conventional Cash-Out Lower the Payment?

The Quick Read: It depends. The payment drops only when the FHA mortgage insurance you shed is worth more than the extra balance and the new loan’s pricing cost you. Cash out raises the balance, which pushes the payment up. Dropping FHA insurance pushes it down. Your numbers decide which one wins.

How Does the Payment Actually Move?

Three things change at once when you pay off an FHA loan with a conventional cash-out loan. Each one pulls the payment in a different direction.

• Mortgage insurance: FHA premiums go away if the new loan stays at or under 80% of the home’s value. That pulls the payment down.
• Loan balance: The new loan covers your payoff, any other liens, financed closing costs, and the cash you take. That pulls the payment up.
• Rate and term: A new credit-and-pricing picture and a fresh loan term can push either way. A longer restart lowers the monthly figure and raises total interest.

Some borrowers see the payment fall. Others take a modest amount of cash and see it stay flat. Borrowers who take a lot of cash usually see it rise. A small cash-out is the one most likely to come out ahead. A large one rarely does.

Why FHA Insurance Is the Real Lever

FHA charges two kinds of mortgage insurance. There is an upfront premium of 1.75% of the base loan, usually financed into the balance. There is also an annual premium, billed monthly, that runs between 0.15% and 0.75% of the balance depending on term, loan amount, and LTV. LTV, or loan-to-value, is the loan balance divided by the home’s value.

Here is the catch. You cannot pay your way out of it. HUD states that for loans with case numbers assigned on or after June 3, 2013, annual premiums run for the maximum permitted period, and borrowers may not request early cancellation by prepaying principal.

That period depends on your starting LTV:

Most buyers who put down 3.5% are in the first row. Their premium can follow the loan for decades. That is why a refinance becomes the only practical exit.

Older loans follow older rules. HUD cancels annual premiums automatically on some pre-June 2013 loans once the balance reaches 78% of the original value and five years of premiums are paid. If yours is one of those, the premium may drop off by itself soon. That makes a refinance less valuable.

Where Conventional Mortgage Insurance Differs

Conventional insurance, called PMI (private mortgage insurance), has an exit built in. The federal consumer-finance regulator explains that you can ask to cancel once your balance reaches 80% of the home’s original value. The servicer must generally end it automatically when the balance is scheduled to reach 78%.

A standard conventional cash-out generally stays at or under 80% of the home’s value for a one-unit primary residence, so it usually carries no monthly mortgage insurance at all. Caps are lower on two- to four-unit homes.

That is the whole payment case in one sentence: you trade an insurance charge that can last decades for a loan with none, and you pay for that with a bigger balance and new pricing.

Does Cash-Out Raise the Payment Even Without FHA Insurance?

Yes, it can. People miss this one.

Say you own a home worth a round number and owe 70% of it on an FHA loan. You want to take 10% of the value out as cash. The new loan lands at 80%, right at the cap. You have removed the FHA premium, but you have also added a tenth of the home’s value to the balance, plus financed closing costs, and possibly restarted a 30-year clock.

Now say you owe 60% and take only 5% in cash. The new loan is 65% of value. The balance barely grows. The premium disappears. The payment has a decent shot at dropping.

The difference is the size of the cash-out. Across the wholesale programs Lendmire places files with, the borrowers who come out ahead on payment are usually the ones taking modest cash or none at all. Borrowers taking the maximum are buying liquidity, not a lower payment. Both are fine goals. They are different goals.

What If You Only Want the Lower Payment?

If a lower payment is your only goal, cash-out may be the wrong tool. A rate-and-term refinance replaces your loan without adding cash, so the balance stays about where it is. Conventional rate-and-term can go to higher leverage than cash-out, but once you pass 80% mortgage insurance returns. It is not a cash-out loan, so it does not fit this question.

If you are staying in FHA, there are other paths. Lendmire’s FHA cash-out refinance program page lays out the version that stays inside FHA. It reaches 80% LTV on a home you have owned and occupied for 12 months before the case number. The premium continues, and so does the FHA loan’s other character, including its lower credit floors. Across the programs Lendmire places loans with, the FHA starting point is a 580 decision score. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.

If you need your payment lower and your existing loan is FHA, the FHA Streamline refinances an existing FHA loan with no appraisal, a limited credit review, and a net tangible benefit. The mortgage insurance premium continues after a Streamline, so this path will not remove it. HUD may partly refund the upfront premium on an FHA-to-FHA refinance within three years, which you give up when you leave FHA. Check with a loan officer on how that applies to your file.

Lower Payment Is Not the Same as Lower Cost

A lower monthly payment can still cost you more over the life of the loan. Two things cause it.

Term reset. Say you are eight years into a 30-year FHA loan. A new 30-year conventional loan puts you back at year zero. The monthly figure shrinks because the payments are spread across more years. You then pay interest for more years in total.

Closing costs. A refinance carries closing costs. You can pay them in cash or finance them into the loan. Financing them raises the balance, and the payment follows.

The way to test it is break-even. Divide your total closing costs by your monthly savings. The answer is the number of months before the refinance starts paying you back. If you may move or sell before then, the move loses money even when the payment drops. Cash-out complicates the math, because the extra balance eats part of the saving. Count it in before you divide.

What Does the Lender Review?

A conventional cash-out gets a full review. Expect these steps:

1. Equity test. The new loan must include your payoff, other liens, and financed costs, and still fit under the cap. Cash is whatever is left.

2. Appraisal. The appraised value sets the ceiling. A lower value shrinks the available loan by the cap percentage of the lost value.

3. Underwriting. Income, credit, debt ratios, and reserves are all looked at again. Conventional loans usually ask for a stronger credit profile than FHA.

4. Disclosures. You receive a Loan Estimate up front and a Closing Disclosure before closing. The CFPB’s Your Home Loan Toolkit explains both forms, and notes that certain costs generally cannot rise by more than 10% between the estimate and closing.

Compare Loan Estimates line by line. The cost of the loan sits in them.

When Is This a Bad Idea?

Skip the conventional cash-out in these cases:

• Your credit has slipped. FHA is more forgiving, and you lose that when you leave.
• You are close to the premium’s natural end. A borrower who put 10% or more down after June 2013 sees the annual premium end after 11 years. Pre-June 2013 loans may cancel on their own.
• You would end up above the cap. If the new loan has to exceed 80%, a standard cash-out is not available, and a limited version carries mortgage insurance.
• You are moving soon. Closing costs may not pay back.
• You are borrowing mainly to fund spending. Turning unsecured debt into secured debt can lower the monthly bill but puts the house behind it.
• You value assumability. FHA loans can generally be assumed by a qualified buyer, which conventional loans generally cannot.

If you live in Texas, cash-out on a homestead follows its own state rules, so ask a loan officer how they apply.

Key Terms Defined

Annual MIP: The yearly FHA mortgage insurance premium, billed monthly with your payment.

Upfront premium: A one-time FHA charge of 1.75% of the base loan, usually rolled into the balance.

PMI: Private mortgage insurance on a conventional loan, which can be cancelled as your equity grows.

LTV: Loan-to-value, the loan balance as a percentage of the home’s value.

Cash-out refinance: A new, larger loan that pays off the old one and hands you the difference in cash.

Break-even: The months needed for monthly savings to repay your closing costs.

Next Step

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 full file review, and nothing here is a commitment to lend.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD FHA Info Center – MIP duration (case numbers on/after June 3, 2013)

2. CFPB – When can I remove PMI

3. CFPB – Your Home Loan Toolkit