FHA Cash Out Refinance vs. Home Equity Loan
Key Takeaways
- An FHA cash out refinance replaces your existing mortgage, while a home equity loan is a separate second mortgage.
- Both options let you borrow against your home equity, but they have different costs, repayment terms, and loan structures.
- An FHA Cash Out Refinance may offer lower rates, while a home equity loan lets you keep your current mortgage.
- Compare the costs, trade-offs, and your financial goals before deciding which option may be a better fit for you.
After years of building equity, your home often becomes one of your biggest financial assets. If you’re wondering how you can put that value to use, an FHA cash out refinance and a home equity loan are two options worth considering. Both allow homeowners to tap into their equity, but they come with different requirements, costs, and loan structures, and the right fit depends on your goals and circumstances.
This guide will walk you through how each option works, how they compare, and what to consider before making a decision.
Key Differences Between FHA Cash Out Refi vs. Home Equity Loans
An FHA Cash Out Refinance and a home equity loan are different types of loans. One replaces your mortgage with a new, larger loan, while the other is a second mortgage to go alongside your current one. Here are the key differences you should know.
| Feature | FHA Cash Out Refinance | Home Equity Loan |
|---|---|---|
| Credit Score Requirements | Minimum is often around 550 but may be as low as 500 | Minimum is often between 620 and 680 but will vary by lender |
| Interest Rates | Fixed or variable; typically lower than a home equity loan | Typically fixed, often higher than an FHA cash out refinance |
| Loan Structure | Replaces your existing mortgage, potentially resetting the term of the loan | Second mortgage with another monthly payment |
| Repayment Period | 10 to 30 years | Commonly 10 to 30 years but will vary by lender |
| Upfront Costs | Upfront mortgage insurance premium and closing costs | Closing costs |
| Common Use Cases | To cover large expenses or lock in a better interest rate | To get cash without changing your current mortgage terms |
What Is an FHA Cash Out Refinance?
An FHA Cash Out Refinance replaces your current mortgage with a new, larger loan insured by the Federal Housing Administration (FHA). This allows you to borrow against your home’s equity, up to 80% of its appraised value, and receive the difference between this amount and your original mortgage debt in cash. You’ll then have a single monthly payment to cover the new loan.
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FHA Cash Out Refinance Pros and Cons
Consider the pros and cons of an FHA Cash Out Refinance before deciding if this is the right option for you.
| FHA Cash Out Refinance Pros | FHA Cash Out Refinance Cons |
|---|---|
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What Is a Home Equity Loan?
A home equity loan lets you borrow against the equity you’ve built in your home while keeping your existing mortgage as-is. Unlike an FHA cash out refinance, which replaces your current mortgage with a new loan, a home equity loan is a separate second mortgage that provides a lump-sum payment and is repaid in monthly installments. This means you’ll have two monthly mortgage payments.
Freedom Mortgage doesn’t currently offer home equity loans, but it does offer other ways of tapping into home equity, such as an FHA Cash Out Refinance and a home equity line of credit (HELOC).
Home Equity Loan Pros and Cons
Home equity loans are right for some situations, but they may not be for everyone. Here’s a look at the pros and cons.
| Home Equity Loan Pros | Home Equity Loan Cons |
|---|---|
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When to Choose a Home Equity Loan vs. an FHA Cash Out Refinance
An FHA Cash Out Refinance may be the better option if you want to replace your current mortgage while borrowing against your home’s equity. You may qualify with a credit score as low as 500, and there’s no funding fee. This program may be worth it if your offered rate is similar to or lower than your existing mortgage rate, you prefer a single monthly mortgage payment, or you need flexible credit score requirements. If this is something you’re considering, you can learn more about FHA cash out refinances with Freedom Mortgage.
You may want to look into a home equity loan if you want to keep your existing mortgage, especially if you have a low interest rate you don’t want to lose. Because a home equity loan is a separate mortgage, you’ll make a separate monthly payment.
Final Thoughts: FHA Cash Out Refi vs. Home Equity Loan
Both an FHA Cash Out Refinance and a home equity loan can help you access your home’s equity, but the right option depends on your goals, current mortgage rate, and borrowing needs. Research your options and choose one that best fits your situation.
Want to take the next step? Freedom Mortgage offers HELOCs and FHA cash out refinances. Get started online and apply today to tap into your home’s equity.
Josephine Nesbit is a freelance writer who specializes in housing, mortgages, and personal finance. Since starting her writing business, she’s covered topics, ranging from real estate and home loans, to saving, investing, and retirement. Her work has appeared in national outlets, including U.S. News & World Report, Homes.com, and others. Josephine focuses on helping readers make informed financial decisions, especially when it comes to buying a home, understanding loan options, and planning for long-term goals.
Outside of her publication work, Josephine also teams up with real estate professionals to create content that helps them market their businesses. She writes email copy, blog posts, educational resources, and social media templates that help agents show up consistently, build trust, and connect with potential clients.
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