The Quick Read: Closing costs and the upfront mortgage insurance premium both shrink the cash you take home on an FHA cash-out refinance, but they do it in different ways. Closing costs you roll into the loan use up room under the 80% leverage cap. The upfront premium is 1.75% of the base loan and is added on top. Paying either in cash protects your proceeds but raises the cash you need at the table. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
Most homeowners expect a cash-out to work like a simple subtraction: value times a percentage, minus the old loan, equals a check. The real sequence has a few more steps. This article walks through them in order, shows where the usual rule bends, and ends with the choice you actually face. All program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
What Is an FHA Cash-Out, and What Does It Cost?
An FHA cash-out refinance replaces your current mortgage with a new, larger FHA-insured loan. You keep the difference between the new loan and what you owed, after costs. The program reaches 80% loan-to-value (LTV, the loan balance divided by the home’s appraised value) on a home you have owned and lived in for 12 months before the case number is assigned.
That 80% is the ceiling. The cost items below decide how much of it reaches you as cash.
Lendmire’s FHA cash-out refinance program page covers eligibility. The short version: this is a loan for the home you live in. Second homes and rentals do not qualify, because occupancy decides the leverage.
Key Terms Defined
Base loan amount: the mortgage balance before any financed upfront premium is added. HUD’s handbook glossary uses it to compute LTV.
Adjusted value: the number the 80% is tested against. For a home you have held 12 months or more, it is the appraised value.
Upfront mortgage insurance premium (UFMIP): a one-time premium of 1.75% of the base loan. It is usually financed into the loan. Some pages call it a “funding fee.” On an FHA loan, it is the UFMIP.
Annual mortgage insurance premium (MIP): a separate charge billed monthly as part of your payment. On the programs Lendmire places, it runs between 0.15% and 0.75% of the balance, depending on term, loan amount and LTV.
Closing costs: the one-time fees to complete the loan: lender fees, third-party fees such as appraisal and title, and prepaid items.
CLTV (combined LTV): all liens on the home added together, divided by value. A second mortgage counts.
How the Numbers Get Built, Step by Step
Here is the order a cash-out file follows. Each step changes what is left for you.
1. Eligibility comes first. You need an owner-occupied principal residence. You must have owned and lived in it for 12 months before the case number. Lenders typically look for a clean recent payment history on the current mortgage, and each lender may add stricter rules of its own. Inheritance is a recognized exception to the 12-month ownership rule in HUD’s guidelines, so ask your loan officer if that applies to you.
2. The appraisal sets the value. For a home held 12 months or more, adjusted value is the appraised value. If you bought within the past 12 months, it is the lesser of the purchase price plus documented improvements or the appraised value. That second rule catches people who bought a fixer, renovated, and expect the new value to count in full.
3. The 80% test sets the ceiling. HUD’s Mortgagee Letter 2019-11 lowered the maximum LTV and CLTV on cash-out refinances from 85% to 80% of adjusted value. If you still read 85% online, that page is out of date. The base loan includes three things: payoff of your existing liens, the cash you receive, and any closing costs you finance.
4. Financed closing costs take up room. This is the point many homeowners miss. Every dollar of closing costs rolled into the loan sits under the same 80% cap as your cash. Costs you pay out of pocket do not. So financing costs does not create extra money. It moves money from the “cash to you” bucket to the “fees” bucket.
5. The upfront premium goes on top. HUD computes LTV on the base loan, which excludes the financed UFMIP. So the 80% test is run before the premium is added. The 1.75% is then calculated on the base loan and added to the balance if you finance it. Your final note therefore lands a little above 80% of value. That is normal, not an error.
6. Disclosures lock in the picture. You receive a Loan Estimate early and a Closing Disclosure before closing. Compare the two line by line.
7. Rescission, then funding. On a refinance of your primary residence, you generally have until midnight of the third business day to cancel. Cash-out proceeds are generally not released until that window ends.
The Net Cash Formula
Here is the plain version:
Cash to you = 80% of value − existing loan payoff − financed closing costs.
The upfront premium is then added on top of the loan, but it is not subtracted in that formula. That surprises people, so here is why. The premium raises your balance. It does not come out of your cash line unless you choose to pay it in cash. Either way, you pay for it: through a bigger balance, or through cash at closing.
Illustration only, not a quote. Say your home appraises at 100 units of value. You owe 50 units. The 80% ceiling is 80 units of base loan. Your payoff takes 50. That leaves 30 units, and financed closing costs come out of that 30. If costs equal 3 units, you receive 27 units of cash. The 1.75% premium is then figured on the 80-unit base loan and added to the balance. The new note ends slightly above 80% of value.
Now change one thing. Pay the 3 units of closing costs in cash instead. Your proceeds rise to 30 units, but you needed 3 units of your own money at the table. The base loan stays at 80 units either way.
Financing Costs vs. Paying Cash: What Changes
| Choice | Effect on cash to you | Effect on the loan | Best when |
|---|---|---|---|
| Finance closing costs and UFMIP | Lowest proceeds, no cash due at closing | Highest balance | Cash is tight and you want nothing out of pocket |
| Finance UFMIP, pay other costs in cash | Higher proceeds | Balance grows by the premium only | You have savings and want a smaller loan |
| Pay everything in cash | Highest proceeds | Smallest balance | You have ample cash and want to limit growth in the balance |
Financing lowers what you bring to closing. It also raises the balance that interest and annual MIP are figured on, so the payment is a bit higher over the life of the loan. The “no cash needed” feel has a cost that shows up later. Some third-party pages describe the premium as pay-in-full or finance-in-full. Ask your loan officer how your lender handles it.
Why the Premium Is the Same on a Cash-Out
A common belief is that cash-out carries a higher upfront premium. It does not. The 1.75% is the same one other FHA loans carry. HUD manages the extra risk of a cash-out through the lower leverage cap and the 12-month occupancy rule, not through a bigger premium.
HUD’s ML 2023-05 lowered annual MIP for most forward mortgages. It did not touch the upfront premium. So if you read that “MIP went down,” that applies to the monthly side.
On a 30-year loan above 90% LTV, annual MIP lasts for the term. At or below 90%, it ends after eleven years. A cash-out lands at or below 80% of value on the base loan. Your lender’s disclosures will confirm which rule applies to your file, because the final balance with premium can sit above that line. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
The Upfront Premium Credit (FHA to FHA Only)
If you are refinancing an existing FHA loan into a new FHA loan within three years, a credit may reduce your new upfront premium. Three points matter:
- It is a credit, not cash back. It reduces the premium you owe on the new loan.
- It applies only when the loan being paid off is FHA. Coming from a conventional loan, there is no credit.
- It shrinks as the old loan ages. Early on it is large. By month 36 it is small. Your lender can walk you through the current schedule, and HUD publishes the official version.
If you are leaving a conventional loan, the premium works differently, and there is no refinance credit on that path.
Where the General Rule Breaks
The 80% rule and the premium math hold for most files. These cases bend them.
- Recently purchased homes. Under 12 months of ownership, the lesser-of rule applies to value. Your proceeds may be smaller than the appraisal suggests.
- A second mortgage or HELOC. The 80% cap is combined. A second lien eats directly into available room, even if you are not paying it off.
- County loan limits. Your first mortgage plus any other liens cannot exceed the FHA limit for your county. Limits are set by county and change every year, so a high-value home can hit the limit before it hits 80%.
- Special programs. Hawaiian Home Lands (Section 247) and Indian Lands (Section 248) loans have different rules, including on mortgage insurance and the cash-out cap.
- Not a cash-out. Streamline and rate-and-term refinances follow different rules. The FHA rate-and-term can reach 97.75% on a principal residence occupied for the previous 12 months. That is a different product, with no cash to you.
- Lender overlays. An individual lender can set rules stricter than HUD’s. The same file can look different from one lender to another.
- Rescission. The three-day right applies to refinances of a primary residence, not to purchases. Per the CFPB’s Right to Cancel explainer, missing or incorrect disclosures can delay when the clock starts.
Which Costs Can Change Between Estimate and Closing?
Costs are not all equal in how firmly they are quoted. The CFPB explains that closing costs fall into three groups: costs a lender can raise by any amount, costs it can raise by up to 10% in total, and costs it cannot raise at all. It is illegal to deliberately underestimate costs on a Loan Estimate.
Items that can rise freely include prepaid interest, property insurance premiums and initial escrow deposits. The lender controls its own fees more tightly, unless your circumstances change. A different appraisal result, a credit change or income the lender cannot document can all trigger a revised Loan Estimate.
In practice, build a cushion into your budget. A prepaid or escrow item that rises can reduce your cash dollar for dollar if you are financing everything.
Cash-out files also have items a purchase never sees. You pay per-diem interest on the old loan through its payoff date. Your old escrow account is refunded, and a new one is funded. Title and appraisal fees apply as well. One thing does not carry over: seller credits are a purchase concept and do not apply to a refinance.
When the Costs Do Not Fit
Say the appraisal comes in a little lower than expected. The 80% ceiling drops with it. Your payoff has not changed, and your financed costs have not either. Cash to you takes the whole hit.
If cash is shrinking toward zero, you have a short list of options:
- Pay some or all closing costs in cash instead of financing them.
- Ask your loan officer to compare scenarios with and without the premium financed.
- Pause and ask whether the cash-out still makes sense.
That last one matters. If the net proceeds are small, the cost of the premium and the higher balance may outweigh what you gain. A cash-out you have to stretch to make work is worth a second look. Keeping the loan you have, or using another way to borrow against equity, may fit better. Compare the full cost structure, not only the headline loan amount.
What the Decision Looks Like in Practice
Think of it as four questions, asked in this order:
1. How much cash do I actually need? Work backward from that number, not forward from the maximum.
2. Is my payoff small enough to leave real room? The lower your existing balance, the more of the 80% is yours.
3. Can I pay costs in cash? If yes, your proceeds stay larger and the balance stays smaller. If no, accept a bigger balance and know why.
4. Am I coming from an FHA loan? If so, ask about the premium credit.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
If you are weighing a cash-out refinance on the home you live in against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches.
Frequently Asked Questions
Can I finance the upfront MIP on an FHA cash-out?
Yes, in most cases the 1.75% premium can be added to your loan balance. The 80% test is run on the base loan before the premium, so your final balance ends up slightly above 80% of value. Financing it lowers what you need at closing but raises the balance interest and annual MIP are figured on.
Do closing costs come out of my cash-out proceeds?
If you finance them, yes. They sit under the same 80% cap as your cash, so each financed dollar reduces your proceeds by a dollar. If you pay them out of pocket, your proceeds stay larger, though you need cash at closing.
Is the upfront premium higher on a cash-out than on other FHA loans?
No. It is 1.75% of the base loan, the same as on other FHA loans. Cash-out risk is handled through the 80% cap and the 12-month occupancy rule.
Does the upfront premium refund come to me as cash?
No. It is a credit against the new premium, and only when you refinance FHA to FHA within three years. Coming from a conventional loan, no credit applies.
When do I get the money?
Not at the signing table. A primary-residence refinance carries a three-business-day right to cancel, and proceeds are generally held until it ends. Waiving it requires a genuine personal financial emergency and a handwritten, dated, signed statement, per the CFPB.
For your own numbers on the home you live in, request a scenario review with Lendmire.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. HUD Mortgagee Letter 2019-11
2. HUD Mortgagee Letter 2023-05
3. CFPB Right to Cancel explainer
4. CFPB: Can my final mortgage costs increase from what was on my Loan Estimate?
5. CFPB: Can I ever waive my right to rescind?
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: Does a Spouse Sign an FHA Cash-Out in a High-Cost Closing State? · FHA Cash-Out Recordation Costs for Owners in High-Cost Closing States · Can You Get an FHA Cash-Out on a Condo in Litigation?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.