FHA Cash-Out Refinance vs Conventional Cash-Out to Remove Private Mortgage Insurance

The Quick Read: A conventional cash-out is generally the only one of the two that can end mortgage insurance, and only if the new loan stays near 80% of your home’s value. An FHA cash-out keeps FHA’s own insurance on the new loan. In exchange, it accepts lower credit scores and thinner files. Strong credit and plenty of equity point to conventional. A bruised score or a thin file points to FHA, with a plan to exit later.

One term needs fixing first. FHA loans carry MIP (mortgage insurance premium), not PMI. PMI is the private insurance on conventional loans. People search “remove PMI” when they mean “get rid of my FHA insurance,” and the two work differently.

Lendmire is a mortgage broker. It arranges FHA, VA, conventional and jumbo loans through wholesale lenders, and it does not lend. Its FHA cash-out refinance program page covers the FHA side in more depth. This piece referees the two paths. Every figure below is subject to lender guidelines and full file review, and none of it is a commitment to lend.

Side-by-Side

The two loans cap leverage in similar places. They split on insurance, credit and paperwork.

LTV (loan-to-value) is your new loan balance divided by your home’s appraised value. The conventional leverage cap lives in Fannie Mae’s published eligibility matrix, which lenders can also layer their own rules over. Confirm the current limit with your loan officer, because it moves. County loan limits apply to both programs.

Notice what the table says about equity. Neither loan lets you drain the house. At 80% LTV, you keep a fifth of your home’s value as a cushion, and a low appraisal can shrink or erase the cash on either path. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

When FHA Cash-Out Is the Better Fit

FHA cash-out fits borrowers whose credit, debt load or paperwork would stall a conventional file. Across the wholesale programs Lendmire places FHA files with, a 580 decision score is the starting line. Ratios begin at 31/43 (housing costs and total debts as a share of income) and stretch to 40/50 with documented compensating factors.

Picture a homeowner with a recent credit hiccup and a high debt load. Her FHA balance sits near 65% of the appraised value, and she wants cash for a roof and a consolidated card balance. A conventional lender may decline her or load the file with extra cost for credit. FHA can say yes where conventional says no, provided she has owned and lived in the home for 12 months before the case number is assigned.

The tradeoff is the insurance. A new FHA cash-out carries an upfront premium of 1.75% of the base loan, which is usually financed into the balance. It also carries an annual premium that varies with term, loan amount and LTV.

Here is a detail that surprises people. On a thirty-year loan above the program’s LTV threshold, the annual premium lasts the full term. At or below that threshold, it ends after eleven years. A cash-out capped at 80% falls in the second group, subject to HUD’s current schedule. You would still pay FHA insurance for years, but not necessarily forever. Every figure here varies by lender and program, and guidelines, property type, leverage and credit profile all apply.

FHA also suits someone who wants cash now and plans to move to conventional later, once credit repairs itself. That is a “second refinance” strategy, and it adds a second set of closing costs. Weigh it honestly.

When Conventional Cash-Out Is the Better Fit

Conventional cash-out fits borrowers who want the insurance gone and can meet a stricter file. If your credit is solid, your debts are manageable and your equity is deep, conventional is the cleaner answer. A conventional loan that closes at or below the leverage cap generally carries no mortgage insurance on a primary home. The savings show up as one fewer recurring line in your monthly budget.

Run the equity math in percentages. Say your FHA balance is 60% of appraised value and you want cash that lifts the new loan to 75%. You stay under the cap. You leave FHA, shed its insurance and take cash. That is the best case for conventional.

Now change one input. Say you want cash that pushes the new loan to 85% of value. A conventional cash-out generally won’t go there, because that is above the typical cap. Since the cash is what pushes you over, ask what the cash is for and whether a smaller amount would do. Taking less cash can be the difference between ending insurance and keeping it.

Conventional is also more credit-sensitive. Lenders commonly add cost for lower scores and higher leverage, and those adjustments can eat into insurance savings. This is where a good broker earns the fee: comparing several wholesale lenders’ Loan Estimates side by side, not just one.

Both paths here assume you live in the home. If the property is a rental or second home, occupancy changes the leverage, so tell your loan officer up front.

How Mortgage Insurance Actually Ends

FHA insurance is governed by HUD, not by the federal law that protects conventional borrowers. HUD Handbook 4000.1 is the single source of FHA policy. The federal Homeowners Protection Act, which gives conventional borrowers cancellation rights, does not apply to insurance under the National Housing Act, which is the law behind FHA. That is why hitting 20% equity does not end FHA insurance on most newer loans.

HUD did trim annual premiums for newer loans in Mortgagee Letter 2023-05, but that changed the amount, not the duration question. Check your own loan’s case-number date and original LTV to see which duration applies to you. Refinancing or paying off the FHA loan ends that loan’s obligation.

Conventional PMI has built-in exits. Per the CFPB, you can ask your servicer to cancel when the balance reaches 80% of the home’s original value. The servicer must generally terminate it automatically at 78%, and again after the loan’s midpoint. Investors may have their own guidelines. You must also have no junior liens, such as a second mortgage, to request cancellation.

For the conventional path itself, lenders follow guidelines such as the Fannie Mae Selling Guide, including special handling for items like student-loan payoffs and co-owner buyouts. Ask your loan officer which applies.

Key Terms Defined

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

MIP: the mortgage insurance premium on an FHA loan, made up of an upfront charge and an annual one.

PMI: private mortgage insurance on a conventional loan, generally required when you put down less than 20%.

LTV: the loan balance as a percentage of the home’s appraised value.

Seasoning: the waiting period a program requires, such as owning and living in the home for 12 months.

Is It Worth Doing? The Break-Even Question

Refinancing replaces your whole loan, not just the insurance. A cash-out comes with an appraisal, title work and lender charges, and an FHA loan adds the upfront premium. Those costs show up on your Loan Estimate, and they are built into either the balance or what you pay at closing.

Compare two things. First, the insurance you would stop paying. Second, the cost of the new loan, including its term and the larger balance you carry if you take cash. If you plan to stay put for years, ending insurance can pay off. If you might sell soon, it often does not.

If you do not need cash at all, the cash-out label is the wrong tool. A conventional rate-and-term refinance can drop insurance without borrowing extra. An FHA Streamline needs no appraisal but keeps the premium. The Streamline refinances an existing FHA loan with a limited credit review and requires a net tangible benefit. A second lien or home equity line leaves your first mortgage alone, so FHA insurance continues on that loan.

The Verdict

Neither loan is the better loan. They solve different problems.

Choose conventional if your credit is strong, your equity can absorb the cash you want and you plan to stay. You can end mortgage insurance and keep cancellation rights going forward. Choose FHA if your credit or debt ratios make conventional a stretch and you need the cash now. You trade ongoing insurance for approval odds, and you can revisit the exit later.

If the numbers sit on the line, run both. A loan officer can price each against your actual appraisal. 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

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.

References

1. HUD Handbook 4000.1 Overview

2. CFPB Homeowners Protection Act Examination Manual

3. HUD Mortgagee Letter 2023-05

4. CFPB

5. Fannie Mae Selling Guide B2-1.3-03