Cash-Out Refinance Rates in 2025: FHA vs. Conventional – Which Offers the Best Deal?

In 2025, cash-out refinancing remains a strategic tool for homeowners seeking to tap into their equity, whether to pay off debt, fund home improvements, or invest in other opportunities. But with mortgage rates hovering near 6.5% to 6.75%, securing the best rate hinges on understanding the nuanced differences between FHA and conventional loans. Let’s dissect the numbers to determine which option delivers the most value.

The Base Rate Advantage: FHA Leads, but at a Cost

FHA cash-out refinance rates averaged 6.50% in 2025, edging out conventional loans at 6.75%. However, this advantage erodes when accounting for FHA’s mortgage insurance premiums (MIP). A $320,000 FHA loan on a $400,000 home, for instance, incurs a 1.75% upfront MIP ($5,600) and a 0.55% annual MIP, boosting the effective rate to 6.80%. Meanwhile, a conventional loan at 6.75% avoids MIP entirely if the borrower holds 20% equity, resulting in a 6.25% effective rate.

Key Factors to Decide Between FHA and Conventional

1. Credit Scores:
2. FHA accommodates scores as low as 500 (though lenders typically require 600–660).

3. Conventional loans demand a minimum of 620, often pushing borrowers toward 640–680.

4. Mortgage Insurance Costs:

5. FHA’s upfront and annual MIP add $7,000–$11,000 in costs for a $400,000 loan, making it riskier for borrowers with strong credit.

6. Conventional loans eliminate MIP with 20% equity, saving thousands over the loan term.

7. Property Use:

8. FHA loans are restricted to primary residences, limiting flexibility.

9. Conventional loans allow refinancing for second homes or rental properties, broadening investment options.

10. Debt-to-Income (DTI) Ratios:

11. FHA permits a 43% DTI (stretching to 50% with compensating factors).
12. Conventional lenders often cap DTI at 50%, though stricter limits apply in competitive markets.

The Bottom Line: FHA or Conventional?

• Choose FHA if:
• You have a credit score between 500–660.
• You lack equity to avoid MIP and prioritize lower upfront interest rates.

• Your home is your primary residence, and you need flexibility in using funds.

• Opt for Conventional if:

• You have a credit score above 680 and 20%+ equity.
• You want to refinance a second home or investment property.
• You can tolerate slightly higher base rates in exchange for no MIP and lower long-term costs.

Closing the Deal: Beyond Rates

Closing costs for both loans typically range from 2%–6% of the loan amount, but FHA’s upfront MIP adds an extra layer of expense. For example, a $400,000 FHA loan might incur $8,000–$24,000 in closing fees, plus the $7,000 MIP, totaling up to $31,000. Conventional loans avoid this added fee, making them more cost-effective for borrowers with strong financial profiles.

Conclusion: Prioritize Equity and Credit

In 2025, FHA’s 6.50% base rate may appear enticing, but its 6.80% effective rate (after MIP) outpaces conventional’s 6.25% effective rate for borrowers with sufficient equity. The choice ultimately hinges on your credit score, equity stake, and property type. For those with strong credit and 20% equity, conventional loans deliver the best value. FHA, meanwhile, offers a lifeline to borrowers with weaker credit or limited equity, despite its higher long-term costs.

As mortgage rates remain elevated, the math is clear: avoid mortgage insurance if possible. Homeowners who prioritize minimizing lifetime interest costs should aim for conventional loans, while FHA serves as a necessary compromise for those with fewer options. The decision isn’t just about rates—it’s about aligning your financial profile with the loan that maximizes equity extraction while minimizing lifetime expenses.