A Complete Guide to Tapping Your Home Equity with a USDA Cash-Out Refinance
A USDA Cash-Out Refinance is an excellent option for homeowners with a USDA-backed loan who want to access home equity for home improvements, debt consolidation, or other major expenses. While USDA loans offer zero down payment options for rural homebuyers, the USDA currently does not offer a traditional cash-out refinance program. However, there are alternative refinancing options for USDA loan holders to tap into their home’s equity.
This comprehensive guide will cover:
✅ What is a USDA Cash-Out Refinance?
✅ Why USDA does not offer traditional cash-out refinancing
✅ Alternative cash-out refinance options for USDA borrowers
✅ USDA Streamline and USDA Rate-and-Term Refinancing
✅ USDA loan vs. other cash-out refinance programs
✅ Step-by-step USDA refinance process
✅ Real-life USDA refinancing examples
✅ How to apply for a USDA refinance
What is a USDA Cash-Out Refinance?
A traditional cash-out refinance allows homeowners to refinance their mortgage into a new loan that is larger than their existing balance and receive the difference in cash. Unfortunately, the USDA does not offer a cash-out refinance option, meaning USDA loan holders cannot directly withdraw cash from their home equity through a USDA refinance.
However, USDA borrowers can still refinance their existing loan through a USDA Streamline Refinance, USDA Rate-and-Term Refinance, or by switching to a VA, FHA, or conventional cash-out refinance loan.
Why Doesn’t USDA Offer Traditional Cash-Out Refinancing?
USDA loans are government-backed mortgages designed for low- to moderate-income borrowers in rural areas. The USDA’s primary goal is to help eligible homeowners secure affordable housing with lower interest rates and no down payment, rather than using home equity as a financial tool.
Because of this, the USDA does not allow cash-out refinancing, and all USDA refinancing options must be used strictly for reducing monthly payments or improving loan terms.
💡 However, borrowers with USDA loans who want cash-out refinancing can explore other loan options.
Alternative Cash-Out Refinance Options for USDA Loan Holders
Since the USDA does not allow cash-out refinancing, borrowers looking to access home equity must refinance into a different loan type. The most common alternatives include:
1. FHA Cash-Out Refinance
✔ Allows up to 80% LTV (Loan-to-Value) for cash-out refinancing.
✔ Requires a minimum credit score of 580-620.
✔ Requires FHA mortgage insurance premiums (MIP).
💡 Best for USDA borrowers with limited home equity and lower credit scores.
2. VA Cash-Out Refinance (For Eligible Veterans)
✔ Allows up to 100% LTV, meaning borrowers can access all of their home equity.
✔ No private mortgage insurance (PMI).
✔ Must be a qualified veteran, active-duty service member, or eligible spouse.
💡 Best for USDA borrowers who qualify for VA loans and want full access to home equity.
3. Conventional Cash-Out Refinance
✔ Allows up to 80% LTV for cash-out.
✔ Requires a minimum credit score of 620-680+.
✔ No mortgage insurance required if LTV is 80% or lower.
💡 Best for USDA borrowers with good credit who want to avoid mortgage insurance.
USDA Refinance Options for Existing USDA Loan Holders
If you don’t need cash-out refinancing but still want better loan terms, USDA offers two primary refinancing programs:
1. USDA Streamline Assist Refinance
✔ No appraisal required.
✔ No credit check required (for most borrowers).
✔ Must reduce the borrower’s monthly payment.
💡 Best for USDA borrowers looking to lower their mortgage payment with minimal paperwork.
2. USDA Rate-and-Term Refinance
✔ Allows borrowers to switch to a lower interest rate or new loan term.
✔ Requires a new home appraisal.
✔ Credit check is required.
💡 Best for USDA borrowers who want a better interest rate but don’t need cash-out refinancing.
Comparing USDA Loans vs. Other Cash-Out Refinance Options
| Feature | USDA Loan (No Cash-Out) | FHA Cash-Out Refinance | VA Cash-Out Refinance | Conventional Cash-Out |
|---|---|---|---|---|
| Max Loan-to-Value (LTV) | 100% (No Cash-Out) | 80% | 100% | 80% |
| Cash-Out Allowed? | ❌ No | ✅ Yes | ✅ Yes | ✅ Yes |
| Credit Score Requirement | 580+ | 580+ | 620+ | 620-680+ |
| Mortgage Insurance Required? | No | Yes (MIP) | No | Only if LTV >80% |
| Who It’s Best For | Rural homeowners | Lower credit borrowers | Veterans & military families | High-credit borrowers |
💡 Key Takeaway: USDA loans don’t allow cash-out refinancing, but borrowers can switch to an FHA, VA, or conventional loan to access home equity.
USDA Loan Refinancing Process
Step 1: Check USDA Loan Eligibility
✔ Confirm that your current loan is USDA-backed.
✔ Check if you meet USDA refinance guidelines.
Step 2: Choose a Refinance Option
✔ USDA Streamline Assist for lower payments with minimal paperwork.
✔ USDA Rate-and-Term Refinance for better loan terms.
✔ FHA, VA, or Conventional Cash-Out Refinance for accessing home equity.
Step 3: Find a Lender
✔ Work with a USDA-approved lender for USDA refinancing.
✔ Work with an FHA, VA, or conventional lender for cash-out refinancing.
Step 4: Complete the Application Process
✔ Submit income, credit, and property documents.
✔ Get an appraisal (if required).
✔ Receive lender approval.
Step 5: Close on the Loan
✔ Sign final documents.
✔ New loan replaces your old USDA loan.
✔ Receive cash (if applicable).
Real-Life USDA Refinance Examples
Example 1: Lowering Monthly Mortgage Payments
- Home Value: $250,000
- Current USDA Loan: $180,000 at 6.5% interest
- New USDA Streamline Loan: $180,000 at 4.75% interest
💡 Monthly payment lowered by $150.
Example 2: Refinancing to an FHA Cash-Out Loan
- Home Value: $300,000
- Current USDA Loan Balance: $200,000
- New FHA Loan (80% LTV): $240,000
- Cash Received: $40,000
💡 Used funds for home renovations.
Example 3: Switching to a VA Cash-Out Refinance
- Home Value: $400,000
- Current USDA Loan: $250,000
- New VA Loan (100% LTV): $400,000
- Cash Received: $150,000
💡 Paid off credit card debt and student loans.
Final Thoughts: Is a USDA Cash-Out Refinance Right for You?
✅ If you want to lower your mortgage payment: Consider a USDA Streamline or Rate-and-Term Refinance.
✅ If you need cash from your home’s equity: Refinance into an FHA, VA, or conventional loan.
✅ If you have a VA loan entitlement: A VA Cash-Out Refinance offers 100% LTV.
🏡 Considering your USDA refinance options? Speak with a lender today to find the best solution for your financial needs!