The Quick Read: Mortgage insurance on an FHA cash-out for a paid-off home works the way it does on any FHA loan: it is required, and it has two parts. You pay an upfront premium of 1.75% of the base loan, usually financed into the balance. You also pay an annual premium, collected monthly. Having 20% or more equity does not waive either one. On a 30-year loan at 80% LTV, the annual premium typically ends after eleven years, subject to lender guidelines and full file review.
Can a Paid-Off Home Get an FHA Cash-Out at All?
Yes. A home you own free and clear is eligible for an FHA cash-out refinance. HUD addressed this in Mortgagee Letter 2009-08, which allows properties owned free and clear to be financed as cash-out transactions. That letter’s old 85% cap is outdated, and the current limit is the one described below.
FHA cash-out estimate
Seeded with an example value, a balance to match, and a round cash request; change any field.
Editable benchmark: 7.18% as of November 5, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not an FHA cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the FHA cap on a principal residence with the upfront premium financed, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
An illustration, not a Loan Estimate, an approval, a quote, or a commitment to lend. The rate shown is the weekly Freddie Mac thirty-year conventional benchmark, used as a market reference; an FHA cash-out is priced by the lender at lock, and this is not an FHA cash-out refinance quote. HUD’s cap limits the base loan; the upfront premium is financed on top of the capped base loan; the monthly premium for the first year follows the snapshot’s schedule. Cash available means the base loan the cap permits less the balances retired, before closing costs, which this calculator leaves out. The line figure applies the line program’s combined loan-to-value ceiling to the same value and balance. Taxes and insurance are estimates you can edit. Licensed in sixteen states for consumer mortgages.
The key rule is occupancy. The home must be your principal residence. At least one borrower must have owned and lived in it for the 12 months before the case number is assigned. Second homes and rentals do not qualify for this program.
On a home that meets those tests, the FHA cash-out reaches up to 80% LTV. LTV, or loan-to-value, is the loan balance divided by the home’s value. On a paid-off home, that means the new loan can be up to 80% of value, so you keep at least 20% equity.
You are going from no mortgage payment to a first-ever one. That shapes everything below.
Key Terms Defined
Base loan: the loan amount before the financed upfront premium is added. Both premiums are figured from it.
Upfront premium: a one-time FHA insurance charge of 1.75% of the base loan. You can pay it in cash at closing or roll it into the loan.
Annual premium: the ongoing FHA insurance charge. It is divided into monthly installments and added to your payment.
LTV (loan-to-value): the loan amount as a percentage of the home’s value. A lower LTV means more equity.
Adjusted value: the value FHA uses to size the loan. It starts with the appraisal, and the lender applies HUD’s rules to it.
Cash-out refinance: a new mortgage that gives you cash from your equity. On a paid-off home, there is no old loan to pay off first.
Why Does an FHA Cash-Out Carry Mortgage Insurance?
Because FHA requires it on every loan. The CFPB says FHA mortgage insurance is required on all FHA loans, with an upfront cost and a monthly cost built into the payment.
This surprises people with large equity. On a conventional loan, private mortgage insurance is typically tied to a down payment under 20%. FHA works differently. Equity does not switch it off. A homeowner with a paid-off house and 100% equity still pays it on an FHA cash-out.
One more point. The insurance protects the lender if you fall behind, not you. You pay for it, and the lender is the beneficiary. That is the trade for FHA’s flexible credit approach.
FHA mortgage insurance also does not change with your credit score. The CFPB notes the cost is the same regardless of score. Your interest rate and your approval still depend on the lender, but the insurance line does not shift because of a 600 versus a 720.
How the Upfront Premium Works
The upfront premium is 1.75% of the base loan, and a cash-out gets the same rate as any other FHA purchase or refinance. HUD Mortgagee Letter 2023-05 sets it in Appendix 1.0 for all mortgages, with narrow exceptions for older FHA streamline and simple refinances.
There is no cash-out surcharge. A common myth says cash-outs cost a higher premium. The upfront rate is the same 1.75%.
It sits on top of the base loan. If you finance it, your note amount is slightly higher than the base loan. At an 80% base loan, 1.75% of that base works out to roughly 1.4% of the home’s value. The CFPB notes that rolling the premium in raises the loan amount and the overall cost, because you pay interest on it.
You can also pay it in cash at closing. Financing it is the usual choice. The tradeoff is simple: cash now, or a larger balance and a larger interest bill later.
A February 2023 change cut the annual premium only. It did not touch the upfront premium, per HUD’s FHA INFO 2023-11. Older articles that say the upfront premium fell are wrong.
How the Annual Premium Works
The annual premium runs between 0.15% and 0.75% of the balance, depending on three things: the loan term, the loan amount, and the LTV. HUD publishes the grid in Appendix 1.0 of the same mortgagee letter. It is a program fact, not a price, and your lender confirms the exact tier on your file.
Here is how each factor works.
Term. A term of 15 years or less uses a separate grid with lower annual premiums. Terms over 15 years use the main grid.
Loan amount. HUD splits loans at a threshold tied to the national conforming loan limit. That limit moves every year, so county loan limits and the threshold apply. A base loan above the threshold carries a higher annual rate.
LTV. This drives how long you pay. On a 30-year loan above 90% LTV, the annual premium lasts the full term. At or below 90%, it ends after eleven years. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
A standard FHA cash-out tops out at 80% LTV. That puts a 30-year cash-out in the eleven-year tier, never the 90%-plus tier. Treat that as the typical outcome and confirm it on your file, because your specific term and amount set the exact rate.
The annual premium is collected in monthly installments. It is calculated on the average outstanding balance, which excludes the financed upfront premium, so the premium is not simply a fixed share of the starting base loan. Because the balance shrinks as you pay, the dollar amount drifts down slowly over time.
A Paid-Off Home, Step by Step
Picture a homeowner with a home worth a round number, no mortgage, and a need for cash. Here is how the deal works, described in percentages and plain words.
1. Eligibility check. The home is a principal residence. You have owned and lived in it for at least 12 months before the case number is assigned.
2. Appraisal. The appraisal sets the starting point for adjusted value.
3. Sizing. The base loan can be up to 80% of adjusted value. With no payoff, the base loan is essentially the cash you take plus your closing costs. The financed upfront premium is then added on top, so the note amount lands slightly above the base loan.
4. Insurance set. The upfront premium is 1.75% of the base loan. The annual premium is chosen from the grid by term, loan amount and LTV.
5. Underwriting. The lender reviews income, credit and debt. The new payment, including insurance, has to fit. For FHA loans, the base ratio pair is 31/43 (housing to total) with no compensating factors. Documented compensating factors can stretch those limits as far as 40/50, which is available only at the highest credit tier. The automated finding governs most files.
6. Disclosure. Your Loan Estimate shows the mortgage insurance and your total closing costs. Compare it line by line.
Lendmire arranges this loan through wholesale lenders. It does not lend, and approval stays with the lender. Eighty percent LTV is a ceiling, not a promise of cash. Underwriting can land you below it.
Credit is part of the picture. For FHA loans, the wholesale programs Lendmire places files with start at a score of 580. HUD allows a lower tier, but the network does not reach below 580.
What Your Monthly Budget Looks Like
You move from no payment to a new one with several layers. Principal and interest come first. Then property taxes and homeowners insurance. Then the annual mortgage insurance premium, folded in monthly.
The insurance line is the one people forget to budget. It sits on top of everything else. Over eleven years, it is a real cost. After that, in the typical 80% LTV case, the line drops off. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
Here is the part worth saying out loud: the loan that frees up your equity also introduces a payment you did not have. For a paid-off home, that is the real decision. The question is not just “what does the insurance cost.” It is whether you want a mortgage payment at all.
Where the General Rule Breaks
The 80% LTV, eleven-year picture is the typical case. Several edge cases change it. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
Occupancy. Second homes and investment properties do not qualify for a standard FHA cash-out. The home has to be your principal residence.
Recently owned homes. Fail the 12-month ownership and occupancy test and a standard cash-out is off the table. A home that was recently gifted or inherited needs a file-by-file answer from the lender. Do not assume.
Higher leverage. A purchase at 96.5% financing sits in the tier where the 30-year annual premium lasts the full term, which a standard cash-out cannot reach. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
Shorter terms. A term of 15 years or less uses a separate, lower-rate grid.
FHA-to-FHA refinances. A premium refund credit can apply when you refinance one FHA loan into another within three years. It does not apply to you. A paid-off home has no prior FHA loan, so there is nothing to credit.
Streamline and rate-and-term refinances. These are different products. The Streamline refinances an existing FHA loan with no appraisal and a limited credit review. The FHA rate-and-term with an appraisal reaches 97.75% on a principal residence occupied for the previous twelve months. Neither gives you cash out.
Hawaiian Home Lands. Section 247 loans do not require the annual premium, per the same HUD mortgagee letter. That is a narrow program.
FHA vs. Conventional on a Paid-Off Home
| Factor | FHA cash-out | Conventional cash-out |
|---|---|---|
| Insurance trigger | Always required | Tied to equity under 20% |
| Equity waives it? | No | Often yes |
| Duration | 11 years at 80% LTV, 30-year term | Ends with enough equity |
| Credit score effect | None on the premium | Usually affects cost |
| Ownership test | 12 months, owner-occupied | Varies by program |
This is the heart of the choice. If your credit is strong and you have plenty of equity, conventional may avoid mortgage insurance entirely. If your credit needs flexibility, FHA’s insurance is the cost of that flexibility.
This one is a genuine toss-up for many borrowers. Strong credit often points to conventional. Thinner credit often points to FHA. The file decides.
Common Misconceptions
“With 20% equity I skip FHA insurance.” No.
“A cash-out costs a higher premium.” No. The upfront rate is the same 1.75%.
“I pay insurance for the life of the loan.” Not necessarily. At or below 90% LTV on a 30-year loan, it ends after eleven years. Check your tier. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
“A paid-off home cannot get an FHA cash-out.” It can, since HUD allows free-and-clear properties to be financed as cash-out.
“FHA still lends to 85%.” That is out of date. The old 85% cap in the 2009 letter has since been lowered. Today’s standard cash-out is 80%.
“Credit score changes the premium.” It does not.
Does FHA Fit Your Situation?
FHA tends to fit when:
- Your credit score is in the range where conventional pricing gets harder.
- You live in the home and have for at least 12 months.
- You want cash from equity and accept a new payment with insurance.
- The base loan stays within county loan limits.
FHA tends to fit poorly when:
- Your credit is strong and you could avoid insurance on a conventional cash-out.
- You only need a small amount, where a home equity loan or line may cost less overall.
- You plan to leave the loan within a few years, since the upfront premium is a sunk cost.
Many borrowers budget for the cash they want and forget the premium rides on top of it. Ask for the insurance line on the Loan Estimate before you decide how much to take.
If you are weighing a cash-out refinance on a home you own outright, Lendmire can help you compare the programs and the equity each one reaches. Reach the team at 828-256-2183.
Frequently Asked Questions
Can I do an FHA cash-out on a paid-off home?
Yes, if the home is your principal residence and you have owned and lived in it for the 12 months before the case number. The loan reaches up to 80% LTV, subject to lender guidelines and full file review.
How long do I pay the annual premium?
On a 30-year loan at or below 90% LTV, it typically ends after eleven years. Above 90% LTV it lasts the full term. A standard cash-out caps at 80%, so it normally lands in the shorter tier. Your lender confirms the exact tier.
Can I pay the upfront premium in cash?
Yes. You can pay the 1.75% upfront premium at closing or roll it into the loan. Financing it raises your balance and the interest you pay over time. Paying cash keeps the balance lower.
Does a higher credit score lower my mortgage insurance?
No. Your score still affects your interest rate and approval, which the lender decides.
Can I get a premium refund credit on a paid-off home?
No. The refund credit applies when you refinance an existing FHA loan into a new FHA loan within three years.
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.
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References
1. HUD Mortgagee Letter 2009-08 (Limits on Cash-Out Refinances)
2. CFPB
3. HUD Mortgagee Letter 2023-05 (annual MIP reduction; Appendix 1.0)
This article is part of Lendmire’s FHA cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How the Annual MIP Clock Works on an FHA Cash-Out Refinance · How to Switch From an FHA Streamline to an FHA Cash-Out · How FHA Cash-Out Underwriting Works After a Conventional Denial
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
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Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.