The Quick Read: A home with no mortgage still pays FHA mortgage insurance on a cash-out refinance. The cost has two parts: a one-time upfront premium of 1.75% of the base loan, and an annual premium collected monthly. On a cash-out, which is capped at 80% of the home’s value, that annual premium runs for eleven years. Paying off your old mortgage does not exempt you, because FHA charges on every new loan it insures.
Many owners who have finished a mortgage assume that 20% or more equity means no mortgage insurance. That is conventional-loan logic. FHA works differently, and the gap between those two assumptions is where surprises show up at the closing table.
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.
This article explains how the insurance is calculated, how it shapes your net cash, where the general rule bends, and how to decide whether the program fits you. Every program figure is subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Key Takeaways
- The upfront premium is 1.75% of the base loan. It is usually financed, which means it is added to the balance.
- The annual premium sits between 0.15% and 0.75% of the balance, depending on term, loan amount and LTV. It is billed monthly.
- A cash-out tops out at 80% LTV, so the annual premium ends after eleven years instead of lasting the full term.
- A paid-off home has no old FHA loan, so there is no upfront-premium credit to offset the cost.
- The insurance protects the lender, not you. It is a cost of the program’s flexibility.
Can a Paid-Off Home Get an FHA Cash-Out Refinance?
Yes. An FHA cash-out refinance can be written on a home you own free and clear. The new loan simply becomes the first lien where none existed. There is no payoff to document and no payment history to review on the old loan.
You still have to meet the standard conditions. Across the programs we arrange, the home must be your principal residence, owned and occupied for 12 months before the case number is assigned. Investment properties and second homes do not qualify for this program, so an FHA cash-out is not the tool for a rental or vacation home.
Lendmire is a mortgage broker, so it arranges the file through wholesale lenders rather than lending the money itself.
What Are the Two FHA Mortgage Insurance Charges?
FHA mortgage insurance has an upfront premium and an annual premium. Both apply to a cash-out on a paid-off home. They work differently, so it helps to see each one separately.
The upfront premium. This is 1.75% of the base loan. Most borrowers finance it, which adds it on top of the base loan. You can also pay it in cash at closing. Financing it keeps cash in your pocket today and raises your balance, which means you pay interest on the premium over time.
The annual premium. This is a percentage of your loan balance, collected in monthly installments as part of your housing payment. The percentage depends on your loan term, your loan amount and your LTV. Across the programs we place files with, it falls between 0.15% and 0.75% of the balance. Your Loan Estimate and Closing Disclosure show the monthly insurance line in the Projected Payments section.
One detail matters here. The annual premium has a two-tier structure for longer terms, and the dividing line is a base-loan threshold tied to the conforming loan limit. Because that limit changes each year, confirm which tier applies to you by asking your loan officer for the current threshold, not by relying on an old chart. HUD’s Mortgagee Letter 2023-05 is the document that set the current premium schedule and the eleven-year duration for loans at or below 90% LTV. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
Why Does the Annual Premium Last Eleven Years on a Cash-Out?
The duration depends on your LTV at origination. On a thirty-year loan above 90% LTV, the annual premium lasts for 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.
An FHA cash-out cannot exceed 80% LTV. HUD cut the cap from 85% to 80% to lower risk on cash-out loans, as its announcement of the change explains. Because origination LTV can never pass 80%, every FHA cash-out falls in the at-or-below-90% band. That puts the annual premium on the eleven-year schedule. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
Two things people often get wrong:
- You cannot cancel early by paying down principal. HUD’s FHA answers page on premium duration states that prepaying principal does not end the premium early. Reaching 20% equity on paper does not change that.
- A new appraisal does not shorten it. The eleven years run from origination, so a higher later value does not move the end date.
The practical exit is a refinance into a different loan. If your equity grows and your credit is strong, you can refinance into a conventional loan later, which ends the FHA premium. That swap comes with its own closing costs, so it is a decision to price out, not an automatic win.
How Is the Loan Built? A Worked Example in Percentages
Take a home whose appraised, adjusted value we call 100%. Here is how a paid-off-home cash-out stacks up, step by step, using program figures only:
| Step | What happens | Result |
|---|---|---|
| 1. Value | Appraisal sets the adjusted value | 100% |
| 2. Loan cap | FHA cash-out maximum | 80% of value |
| 3. Upfront premium | 1.75% of the base loan | About 1.4% of value |
| 4. If financed | Premium added to the base loan | Roughly 81.4% of value total |
| 5. Net cash | Base loan less closing costs and any liens | Below the cap |
| 6. Annual premium | Monthly, for eleven years | 0.15%–0.75% of the balance per year |
The 1.4% in step 3 is simply 1.75% multiplied by the 80% base loan, expressed as a share of the home’s value. The step 4 total shows the balance once the financed premium is added to the base loan, while the 80% cap applies to the base loan itself. Treat that as a general illustration, since how a lender presents the financed premium against the cap can vary, and your Loan Estimate will show the actual figures.
Step 5 is the one that catches people. The 80% cap covers the whole base loan, including financed closing costs and any lien that stays on the home. So 80% LTV does not mean 80% of your home’s value lands in your bank account. Closing costs and the premium come out of that amount. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
What Does the Cost Look Like Over Time?
Here is how the two charges behave across the life of the loan:
| Period | Upfront premium | Annual premium |
|---|---|---|
| At closing | Due, or financed into the loan | Not yet collected |
| Years 1 through 11 | Already paid or financed | Collected monthly |
| After year 11 | Done | Ends on a 30-year cash-out |
| Early payoff | Not refunded as cash | Stops when the loan is paid off |
A paid-off home had no payment at all before. So any FHA cash-out adds a new monthly obligation, and the annual premium is part of it. Lenders count that full monthly amount, premium included, when they test your debt-to-income ratios. The base pair is 31/43 for housing and total debt, and documented compensating factors can stretch that toward 40/50 at the top tier.
Think of the total insurance cost as a stack, not a single number: the upfront premium, plus eleven years of monthly premiums on a balance that shrinks slowly in the early years. That is why a borrower who only needs a modest amount of cash may find FHA expensive per dollar borrowed, and why a borrower who needs the maximum cash may feel the premium matters less.
Does the Upfront-Premium Credit Apply to a Paid-Off Home?
No, and this is the biggest edge case on the page.
When someone refinances an existing FHA loan into a new FHA loan within a limited window, a credit for part of the old upfront premium can reduce the new one. That credit only offsets a new FHA premium. It is never paid out as cash. A paid-off home has no old FHA case, so no credit exists. You pay the full 1.75% on the new base loan.
Other named exceptions exist:
- Loans endorsed before March 20, 2023. These keep their older premium schedules. This matters if you already hold an older FHA loan, but not for a free-and-clear borrower.
- Shorter terms. Terms of 15 years or less use a separate, lower annual-premium table. A shorter term raises the monthly payment, so it works for borrowers with room in their budget.
- Hawaiian Home Lands and Indian Lands. Special programs under Section 247 and Section 248 follow different premium rules. HUD’s Mortgagee Letter 2023-05 covers them separately, and they apply to a narrow set of borrowers.
FHA vs. Conventional vs. Home Equity: Which Fits a Paid-Off Home?
If you own your home outright, you have more choices than most borrowers. FHA is one of them, and it is often not a more affordable one.
| Factor | FHA cash-out | Conventional cash-out | Home equity loan or HELOC |
|---|---|---|---|
| Mortgage insurance | Upfront and annual | Often avoided at low LTV | None |
| Lien structure | New first mortgage | New first mortgage | Second lien on the home |
| Credit flexibility | Wider | Tighter | Varies by lender |
| Max leverage | 80% LTV | Varies by program | Varies by lender |
| Best for | Credit that needs flexibility | Strong credit, solid equity | Smaller draws, keep current loan |
For a borrower with strong credit and plenty of equity, conventional is frequently the cheaper path because the insurance may not apply at lower leverage.
Here is where the flip happens. FHA tends to make sense when credit history or debt ratios make conventional approval harder, or when FHA’s wider flexibility on ratios and credit events is the difference between a yes and a no. On credit events, HUD sets the waiting periods: two years from a Chapter 7 discharge and three years from a foreclosure. Those are HUD rules, not a promise from any lender.
A home equity loan or HELOC sits on top of nothing if you have no mortgage. That keeps your lien structure simple, and there is no FHA premium. The tradeoff is that terms vary by lender, and a HELOC has a variable structure that some borrowers do not want. It is worth pricing against an FHA cash-out before you commit.
Who This Fits, and Who It Doesn’t
An FHA cash-out on a paid-off home tends to fit a borrower who:
- Has lived in the home as a principal residence for at least 12 months.
- Needs the flexibility of FHA credit and ratio guidelines.
- Has a clear use for the cash, such as consolidating high-cost debt or funding a major repair.
- Is comfortable with a new monthly obligation that includes the insurance.
It tends to fit poorly for a borrower who:
- Has strong credit and could qualify for a conventional loan without mortgage insurance.
- Only needs a small amount of cash, since the insurance cost is proportionally heavier.
- Holds a rate-free, payment-free home and values that position. Taking cash out converts equity into debt you must repay, a point the CFPB makes in its guide on using home equity.
The CFPB’s research on cash-out refinancing adds that cash-out draws down current wealth, and whether it pays off depends on the cost of extracting the cash compared with the alternatives. That is the right frame: the insurance is one cost in the comparison, not the whole story.
What Does the Process Look Like?
The steps run in a predictable order. This is a consumer mortgage, so the Loan Estimate and Closing Disclosure apply.
1. Confirm eligibility. Principal residence, owned and occupied for 12 months, and a home owned free and clear or with a lien you will pay off.
2. Get a case number and appraisal. The 80% cap applies to FHA’s adjusted value, not simply the raw appraised figure.
3. Document your income and credit. Expect pay records, bank statements and a credit review. The lender runs ratios with the new payment, premium included.
4. Review your Loan Estimate. The monthly insurance sits in Projected Payments, and the upfront premium appears in the costs section.
5. Decide whether to finance the upfront premium. Financing keeps cash in hand and raises the balance. Paying in cash does the reverse.
6. Review the Closing Disclosure. Compare it line by line with the Loan Estimate before you sign.
A low appraisal can shrink your loan ceiling, which cuts the available cash. If the appraisal comes in below your expectation, the premium and closing costs stay about the same while the net cash shrinks. That is a risk worth pricing in before you order the appraisal.
Common Mistakes to Avoid
- Assuming 20% equity cancels the insurance. On FHA, it does not.
- Counting the full 80% as cash. Costs and the financed premium come out of it.
- Expecting a premium refund. No refund is paid as cash, and a paid-off home has no old FHA loan to credit.
- Ignoring the exit. If you plan to refinance into conventional later, price that second closing before you rely on it.
- Treating the insurance as protection for you. It protects the lender. You carry the cost, and you gain flexibility in return.
Key Terms Defined
Upfront mortgage insurance premium (UFMIP): A one-time charge of 1.75% of the base loan, which you can finance or pay in cash.
Annual mortgage insurance premium (MIP): A yearly charge on your loan balance, collected in monthly installments, that lasts eleven years on an FHA cash-out.
Base loan amount: The loan before any financed premium is added.
Adjusted value: The home value FHA uses to apply its LTV cap, which is not always the same as the raw appraised figure.
Free and clear: A home owned with no mortgage or lien against it.
LTV (loan-to-value): The loan balance divided by the home’s value, shown as a percentage.
Frequently Asked Questions
Do I still pay FHA mortgage insurance if my home is paid off?
Yes. The upfront premium applies to every FHA loan, including a cash-out on a home with no mortgage. The annual premium also applies, collected monthly. Mortgage insurance on FHA is tied to the program, not to whether you had a prior loan.
How long does the annual premium last on an FHA cash-out?
Eleven years on a thirty-year term. A cash-out is capped at 80% LTV, which falls under the 90% line, and loans at or below that line drop the premium after eleven years. The lifetime version applies only to loans above 90% LTV at origination. Per HUD’s guidance, paying down principal does not end it sooner. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
Can I finance the upfront premium?
Yes, in most cases. The 1.75% charge can be added to the loan balance, or you can pay it in cash at closing. Financing helps your cash position at closing but raises the balance, so you pay interest on the premium. Your Loan Estimate shows which approach your file uses.
How much cash will I actually receive?
Less than 80% of your home’s value. The cap covers the entire base loan, so closing costs, any financed costs and any lien that stays on the home reduce your net cash. A low appraisal reduces it further.
Is a conventional cash-out cheaper for a paid-off home?
Often, for a borrower with strong credit, because mortgage insurance may not apply at lower leverage. FHA tends to win when credit history or debt ratios make conventional harder to obtain. Comparing both against your own file is the only reliable way to decide.
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.
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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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. HUD Mortgagee Letter 2023-05
2. HUD archived press release on cash-out risk
3. HUD FHA Answers: MIP duration
4. CFPB: Using home equity guide
5. CFPB: Cash-out refinances and paydown behavior of non-mortgage debt balances
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 to Close an FHA Cash-Out in DC and Budget Recordation Costs · How an FHA Cash-Out Limits How Much Home Equity You Can Take · FHA Cash-Out vs Buying Out Heirs on a Home in Probate
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
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.