Refinance an FHA Loan to a Conventional Loan
Learn How It Might Help You Save on Mortgage Insurance
If you’re considering refinancing your FHA loan, you may have the option to choose between two types of loans: refinancing your current FHA loan with a new FHA loan or refinancing with a new conventional loan.
Both options can potentially lower your interest rate and monthly payments. However, refinancing an FHA loan to a conventional loan may lead to significant savings on mortgage insurance costs, especially if you have enough home equity. Read on to learn more about this refinancing strategy.
Benefits of Switching from an FHA to a Conventional Loan
Refinancing from an FHA loan to a conventional loan offers two main ways to save money on mortgage insurance costs:
- Avoid Upfront Mortgage Insurance Premiums: When refinancing with an FHA loan, most homeowners are required to pay a new upfront mortgage insurance premium (UFMIP) equal to 1.75% of the loan amount. In contrast, conventional loans do not have upfront mortgage insurance fees, allowing you to bypass this cost by opting for a conventional loan instead.
- Eliminate Monthly Mortgage Insurance Payments: FHA homeowners must pay monthly mortgage insurance premiums (MIP) for a minimum of 11 years, regardless of their home equity. While private mortgage insurance (PMI) may still be required for conventional loan refinances, you may be able to avoid paying it entirely. When refinancing with a conventional loan, PMI is only required if your home’s equity is less than 20%. Therefore, switching to a conventional loan could help you eliminate mortgage insurance costs that would still apply with an FHA refinance.
Do You Have Enough Home Equity to Stop Paying Mortgage Insurance?
A crucial first step is to estimate your home’s current equity and express it as a percentage. You can check your home’s value on websites like Redfin or Zillow; however, remember these figures are estimates. Your lender will likely request a home appraisal during the refinancing process.
To calculate your home equity, you’ll need your current mortgage balance, which can be found on your monthly statement, as well as the balance of any other home loans, such as a home equity loan. The calculation is straightforward. Here’s an example:
- Current Fair Market Value: $300,000
- Current Mortgage Balance: $225,000
- Current Balance on Home Loan: $0
- Estimated Home Equity: $75,000
In this scenario, the homeowner has $75,000 in home equity. To convert this into a percentage, divide $75,000 by the home’s current value:
Equity Percentage=75,000300,000=0.25 or 25%\text{Equity Percentage} = \frac{75,000}{300,000} = 0.25 \text{ or } 25\%Equity Percentage=300,00075,000=0.25 or 25%
Since the home equity in this example is more than 20%, the homeowner may qualify to refinance into a conventional loan and eliminate mortgage insurance!
Keep in mind that refinancing your FHA loan to a conventional loan will involve submitting a refinance application, providing supporting documents, and meeting your lender’s credit and financial standards for approval. Additionally, there may be closing costs associated with the refinance. Remember that while refinancing can provide immediate savings, the total finance charges over the life of the loan may be higher.