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What Is an FHA Cash Out Refinance & How Does It Work?

How an FHA cash out refinance works, who qualifies, and how much you could access from your home’s equity.

Utilizing the power of a cash out refinance is a great way to fund home improvements or consolidate debt and possibly secure a lower interest rate on your home.

What Is an FHA Cash Out Refinance?

Insured by the Federal Housing Administration (FHA), an FHA cash out refinance lets you replace your current mortgage with a new, larger loan. In the process, you can turn your home equity into cash.

Because FHA loans are government-insured, FHA cash out refinances are often accessible to homeowners whose income or credit score prevent them from qualifying for a conventional cash out refinance loan.

FHA Cash Out Refinance Benefits

As you navigate your refinance options, consider the following key FHA cash out refinance benefits:

Flexible credit score and overall financial requirements
The ability to convert your home equity into cash
Flexibility with how to use the money
The potential for lower interest rates and long-term savings
The opportunity to switch to a fixed-rate loan for more predictable monthly payments

Keep in mind, however, that FHA cash out refinance loans require an upfront and monthly mortgage insurance premium (MIP), which add to your loan cost. You'll also be responsible for associated closing costs that often range from 2% to 6% of your loan amount.

FHA vs. VA vs. Conventional Cash Out Refinance Loans

If you're wondering which cash out refinance makes the most sense for you, let's compare FHA, VA, and conventional options:

FHA Cash Out Refinance	Conventional Cash Out Refinance	VA Cash Out Refinance
All financially qualified homeowners are eligible Minimum credit score could be as low as 550 Mortgage insurance required No funding fee	All financially qualified homeowners are eligible Minimum credit score is often 620 No mortgage insurance with 20% or more equity No funding fee	Only qualified veterans and other homeowners in the military community are eligible Minimum credit score could be as low as 550 No mortgage insurance Funding fee required

How Does an FHA Cash Out Refinance Work?

Cash out refinance applicants who are approved will replace their current mortgage with a new one. The new mortgage will consist of their leftover loan balance on the original loan and up to 80% of the home's appraised value. This enables approved borrowers to continue paying off their home while accessing their equity, which is how much of their home they've paid off, for additional funds.

If approved, you can utilize an FHA cash out refinance for various reasons, which may include:

Changing from an adjustable-rate mortgage to a fixed-rate mortgage
Consolidating high-interest debt, such as that from credit cards, into a single lower-interest payment
Lowering your interest rate
Accessing cash to make home improvements that could increase home value

FHA Cash Out Refinance Example

Here's an example to help you better understand how an FHA cash out refinance might work in real life:

An individual owns a home worth $500,000 and owes $100,000 on their existing mortgage. With an FHA cash out refinance, they may be eligible to refinance up to 80% of the home's appraised value, which is $400,000 (80% of $500,000). After the lender pays off the unpaid mortgage balance of $100,000, the homeowner could receive $300,000 in cash, minus closing costs and other fees. That would mean a starting loan amount of $400,000 for your new mortgage, as it would cover the $100,000 you still owed on your original mortgage plus the $300,000 you cashed out. This means that the more of your home you've already paid off, the more money you'll get in a cash out refinance.

The borrower's new monthly payment will depend on the refinanced loan's rates, terms, and length. Get an idea of what an FHA cash out refinance might look like for you by using our cash out refinance calculator.

How To Qualify: FHA Cash Out Refinance Eligibility

To qualify for an FHA cash out refinance, you must meet the following eligibility criteria:

Appraisal value: The home must be professionally appraised to assess its current value.
Application: An application with proper financial documentation must be submitted to an FHA-approved lender and approved.
Credit score: Generally speaking, you'll need a minimum credit score of 580. That said, some lenders, such as Freedom Mortgage will accept a score as low as 550.
Equity and loan-to-value ratio (LTV): There must be enough equity in the home to qualify. Typically, you can borrow up to 80% of a home's value minus the amount you owe on the original mortgage.
Occupancy: You must have resided in the home a minimum of one year, and the house must be your primary residence.
Payment records: Mortgage payments must have been paid on time for the last 12 months unless the home has been owned for less than a year
Title: There can't be any liens or other claims on your home with rare exception.

Consider what an FHA cash out refi loan would look like for you and take steps toward prequalification.

How To Get an FHA Cash Out Refinance Loan

Better understand the process of getting an FHA cash out refinance loan by reviewing these key steps:

Determine the amount of money you need to complete the task you'd like to tackle with your cash out refinance funds.
Get an estimate on how much money you could receive using a cash out refinance calculator.
Talk with an FHA-approved loan advisor to apply. You'll need to provide specific financial information about your current income, employers, credit, debt, and more.
Your lender will order a professional home appraisal to calculate your home's actual current value.
Start the underwriting process. This is where your lender will formally validate your eligibility for an FHA cash out refinance loan.
Close on your new loan. Once your old mortgage is paid off and you pay any closing costs or other fees, you'll pocket the leftover funds.

While refinancing may require a few steps, Freedom Mortgage is here to help throughout the process.

FHA Cash Out Refinance FAQs

Have additional questions about FHA cash out refinances? We've got you covered.

How Much Can You Borrow with an FHA Cash Out Refinance?

Generally speaking, you can borrow up to 80% of your home's current value with an FHA cash out refinance. The amount you actually cash out will be less than this, however, as you have to use part of that money to pay off the remainder of your first mortgage.

What Are the Interest Rates on an FHA Cash Out Refinance?

Like with any type of loan, FHA cash out refinance loans come with an interest rate likely affected by your personal credit score, income, and finances, as well as the mortgage market and the amount of equity you have in your original home loan.