The Quick Read: On a cash-out refinance, the county taxes the new debt that sits above what you still owe, not the whole new loan. The more cash you take and the more costs you roll in, the bigger that taxable slice gets. A large enough new loan can also reach the county’s higher bands. Treat the county as a worked example here: Maryland law sets this tax, and your own county may do it differently.
Why Use One Maryland County to Explain a National Question?
Local governments can charge more on a cash-out than the lender’s own fees suggest. Montgomery County, Maryland, makes that easy to see. Its charge depends on loan size, not on a flat document fee.
This is not a national rule. A Montgomery County in another state follows its own rules. So does every other county. Think of this page as a pattern to recognize, then a prompt to ask your own settlement agent the same questions.
Most homeowners meet this issue the same way. They price a cash-out, see the lender’s costs, and then find a government line that grew when they asked for more cash. Nobody warned them the line could move. Here is how it works, step by step.
What Is an FHA Cash-Out, Briefly?
An FHA cash-out refinance replaces your current mortgage with a new, larger one and hands you the difference. The new loan pays off the old one, covers closing costs, and puts the remaining equity in your pocket.
The mechanics matter for the tax. The Lendmire FHA cash-out refinance program reaches up to 80% of the home’s appraised value. You also need to have owned and lived in the home for 12 months before the case number is assigned. Those are the program terms Lendmire works with, subject to lender guidelines and full file review.
HUD sets the cap. HUD’s Handbook 4000.1 update transmittal records the cut to 80% on cash-out refinances. The cap used to sit higher. Some borrowers still carry that old number in their heads.
The cap applies to the total new loan. Any government charge you finance into the loan counts toward that 80%. Pay the charge in cash instead, and it comes out of your proceeds or your pocket. Either way, you feel it.
How Is the Loan Underwritten, Start to Finish?
Underwriting sets the new loan amount, and that amount sets the tax. Here is the sequence on an FHA cash-out.
1. The appraisal sets the ceiling. The lender orders an appraisal. The new loan can reach up to 80% of that value, subject to the program and the file.
2. The payoff is added. The loan has to clear your current mortgage and any other lien you are paying off.
3. Costs are added. Closing costs and the financed FHA upfront premium can be rolled in. That premium is 1.75% of the base loan, and it is financed, which makes the loan bigger.
4. Your cash is added. Whatever cash you request is the last piece.
5. The file is reviewed. Credit, income, and ratios are checked. The base pair is 31/43 (housing costs and total debts as a share of income). Documented compensating factors can stretch that to 40/50 at the top credit tier. The automated finding governs most files.
6. The new deed of trust is drafted. This document states the principal amount of debt the home now secures.
That last step is where the county comes in. The principal amount on the new deed of trust is the figure the county looks at.
What Triggers the Charge?
Recording a new deed of trust triggers it. No ownership changes hands in a refinance, so a transfer tax is not the issue. The recordation tax is a separate charge for putting the new debt into the public record.
Three charges get confused, so here they are side by side.
| Charge | What it is | What drives it |
|---|---|---|
| Recording fee | Cost to file a document | Page count, document type |
| Recordation tax | Tax on debt secured | Amount of new debt |
| Transfer tax | Tax on a change of owner | Price or consideration |
Federal disclosure rules draw a line here. Recording fees are charged by document type or physical traits such as page count. A charge based on loan amount is treated like a transfer-type tax instead. Where your settlement agent places a loan-based tax on the disclosure can vary. So read the totals line by line.
How Does the County Find the Taxable Slice?
On a refinance, the county taxes the new principal debt that exceeds the principal remaining on the old debt. County Council materials describe it that way. You can read the Council committee packet for the statutory basis, and a qualified local attorney or title professional can confirm how it applies to a specific loan.
Here is the logic in plain steps.
- The new deed of trust states the new principal amount.
- A refinance affidavit states the unpaid balance of the old deed of trust.
- The old balance is exempt. Only the excess is taxable.
- That excess is run through the county’s tax bands.
In a cash-out, the excess is roughly the cash you take out plus any costs you financed. That is why a cash-out costs more than a no-cash-out refinance of the same home. Same house. Same payoff. More new money, so a larger slice.
Picture a homeowner whose balance sits at half the home’s value. She takes a cash-out at the 80% cap. The new debt above her payoff is about 30% of the home’s value, give or take the rolled-in costs. A neighbor who refinances the same balance with no cash taxes a far smaller slice.
What Are the County’s Layers and Bands?
The county tax has three parts: a base tax, a school increment, and a premium. The premium applies only to larger amounts. The county’s Bill 17-23 page lists the official table, with a base amount that applies to all taxable debt. Above that, premium bands begin at a half-million dollars and step up through several higher breakpoints.
Two mechanics are worth knowing.
- Slices are marginal. A loan that straddles a breakpoint takes the higher tax only on the portion above that line, not on everything below it.
- Amounts are counted per $500 or fraction. The tax is stated per $500 of debt, so the county rounds up to the next block.
This page skips the dollar table on purpose. Tax tables get amended, and a stale number does more harm than none. Pull the current table straight from the county page before you plan around it.
Where Do Sources Disagree?
They disagree on one point, and it matters. Does the premium band depend on the total new loan, or only on the taxable excess?
The county’s own materials say the tax applies to debt above the old principal. Some practitioner commentary describes the premium band as set by the total new loan. A law-firm alert says the tax reaches any amount over the original principal refinanced. Those readings can produce different totals for the same loan.
This is a genuine toss-up for anyone without the settlement agent’s worksheet. Here is the practical read. A cash-out near the half-million line deserves a direct question to the title or settlement company. Ask how they apply the bands. Then confirm with the county’s Department of Finance.
Anyone who hands you a firm dollar figure from a blog post is guessing. (A few of them guess with great confidence.)
What Gets Rolled Into the New Loan?
Anything financed raises the new principal amount, which can raise the taxable slice. On an FHA cash-out, the common items are these.
| Item | Effect on new loan | Effect on tax slice |
|---|---|---|
| Cash you request | Raises it | Raises it |
| FHA upfront premium (1.75%) | Raises it | Can raise it |
| Financed closing costs | Raises it | Can raise it |
| Financed government charges | Raises it | Can raise it |
The FHA upfront premium is the one people overlook. It is financed into the loan, so it sits inside the principal amount on the deed of trust. A bigger loan can mean a bigger taxable slice and a bigger charge on top of it. Lendmire covers that piece in depth in its piece How Much the Upfront Premium Cuts an FHA Cash-Out at the County Limit.
Financing costs also add to the balance. That raises the payment and the base the mortgage insurance is figured on. Cash-out math works best when the borrower sees the whole chain, not one link.
How Do Cash-Out, Rate-and-Term, and Purchase Compare?
The tax treats these three loans differently, even in the same county.
| Loan type | New money? | Recordation exposure |
|---|---|---|
| FHA cash-out | Yes, cash out | Excess over payoff |
| Rate-and-term refinance | Little or none | Small excess, mostly costs |
| Purchase | Acquisition debt | Exemptions may apply |
A purchase-money deed of trust can be exempt to the extent it secures the acquisition loan, if recorded within the required window. That exemption does not carry over to a cash-out. A rate-and-term refinance can still produce a taxable slice if you finance costs into it. But the slice is smaller.
The FHA rate-and-term refinance path can reach 97.75% on a principal residence you have occupied for the previous twelve months. That leverage is higher than the cash-out cap. It also does not hand you cash. For a borrower whose goal is only a different loan structure, that distinction can lower the taxable slice.
What About Exemptions and Credits?
Be careful here. County staff materials describe a first-slice exemption for principal residences, but they describe it on the sale side. The sources do not make clear that it reduces the tax on a refinance. Don’t plan around it for a cash-out unless the settlement agent confirms it in writing.
The same goes for first-time buyer treatment. That applies to purchases. A cash-out refinance on a home you already own is a different transaction.
One sentence on tax: Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
What Does a Practical Broker See in These Files?
On cash-out files in high-cost counties, the surprise is rarely the lender’s fee. It is the government line that moved after the borrower raised the cash request. A borrower asks for a bit more, and the new loan creeps past a tax breakpoint. The charge steps up with it.
Across the wholesale programs Lendmire places FHA files with, the cleanest files start with one question. What does the settlement agent estimate for the county charge at the cash amount I actually want? Asking at the start beats finding out at the table. Ask again if the cash amount changes.
Occupancy matters too. Standard FHA cash-out is for an owner-occupied principal residence you have owned and lived in for 12 months. A home you bought recently, or one that is not your primary residence, falls outside that lane. Occupancy decides leverage, so confirm yours before you build a plan.
Who Pays, and Where Does It Show Up?
You pay, as the borrower, at closing. Government charges are set by government action. A lender cannot waive them, and they do not differ from one lender to the next. So when you compare offers, compare the lender-controlled costs.
The charge appears under taxes and government fees on both the Loan Estimate and the Closing Disclosure. The CFPB explains the tolerance rules that decide what can change between the two. Transfer-type taxes generally cannot rise absent a change in circumstances. Recording fees can rise up to 10% in aggregate.
If you raise your cash request, the loan amount grows. The tax estimate can move with it. That can count as a change in circumstances. So a figure that changes after you change the loan is not necessarily a mistake.
Three habits help.
- Get the county charge estimate in writing at the start.
- Re-ask if you change the cash amount.
- Check every government line on the Closing Disclosure against the Loan Estimate.
The charge is a one-time cost, not a monthly one. If you finance it, it joins the loan balance, and that carries into the payment and the mortgage insurance base.
What Does the Decision Look Like?
Run it as a short checklist. Skip any step and the surprise shows up later.
1. Confirm eligibility. Own and occupy the home as a principal residence for 12 months before the case number.
2. Know your payoff. The old balance is the exempt part of the new loan.
3. Decide the cash you need. Round-number requests can push a loan over a band. A smaller request can sit below it.
4. Choose pay-or-finance. Financing adds to the loan within the 80% cap. Paying in cash reduces the check you get.
5. Verify the county math. Ask the title company how it applies the bands, then check with the county.
6. Weigh the alternative. A rate-and-term refinance or keeping your current loan may cost less in government charges. It also gives you less cash.
That last point is the honest one. Sometimes the right answer is a smaller cash-out. Sometimes it is no cash-out.
Key Terms Defined
Recordation tax: A tax charged when a deed or deed of trust is filed in the public record, based on the amount of debt or consideration.
Deed of trust: The document that pledges your home as security for the loan and states the principal amount.
Refinance affidavit: A sworn statement of the unpaid balance on the old loan, used to show which part of the new loan is exempt.
Taxable excess: The new principal debt above the old balance. In a cash-out, it is roughly the cash taken plus financed costs.
Upfront premium: The FHA mortgage insurance charge of 1.75% of the base loan, which is financed into the loan.
Case number: The FHA number assigned to your loan. The 12-month ownership and occupancy test is counted back from it.
Frequently Asked Questions
Is the tax on the whole new loan or just the increase?
County materials say it applies to new debt above the principal remaining on the old loan. Some practitioner sources describe the premium band as set by the total new loan. Ask your settlement agent how they apply it, and confirm with the county.
Do transfer taxes apply on a refinance?
No, because ownership does not change. The recordation tax is what applies, since a new deed of trust is being recorded.
Can I finance the recordation charge into the loan?
Often yes, as long as the total stays within the program’s 80% cap on an FHA cash-out. Financing it raises the balance and, with it, the payment and the mortgage insurance base. Paying in cash reduces the money you receive instead.
Does being FHA change the tax?
No. The county taxes the debt, not the loan program. FHA matters because its financed upfront premium increases the principal amount, and because its 80% cap limits how much you can roll in.
How do I get the exact figure?
Ask the title or settlement company for a written estimate at your intended cash amount. Then check it against the county Department of Finance’s current table. 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 brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
For the program’s current guidelines, see FHA loan programs.
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References
1. HUD Handbook 4000.1 update transmittal
2. CFPB Regulation Z, section 1026.37
3. Montgomery County Council committee packet on recordation tax
4. Montgomery County Department of Finance: Bill 17-23 Recordation Tax Changes
5. CFPB: Can my final mortgage costs increase from the Loan Estimate?
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: How to Do an FHA Cash-Out on a Texas Second Home · Conventional Cash-Out vs FHA Cash-Out on a Condo · How to Get an FHA Cash-Out After a Credit or DTI Denial
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.