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 a New FHA Upfront Premium: Most FHA refinances require a new upfront mortgage insurance premium, generally 1.75% of the base loan amount. Conventional loans do not charge FHA UFMIP, but some conventional PMI structures can include an upfront premium. Compare your specific insurance structure.
• Reduce or Eliminate Ongoing Insurance: FHA annual MIP duration depends on the case-number date and original LTV. Many current FHA loans require MIP for 11 years or the loan term. A new conventional refinance generally avoids PMI at 80% LTV or less; higher-LTV loans may still require PMI.

✅ Before comparing a refinance from FHA to conventional, review how the two loan types differ—especially mortgage insurance and borrower qualifications. Then compare the costs of a new loan with keeping your current mortgage.

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:

• $75,000 ÷ $300,000 = 0.25
• This equals 25% home equity.

At a $300,000 value and a $225,000 new loan balance, the LTV would be 75%, which generally avoids PMI on a standard conventional refinance. This assumes the new loan amount does not increase through financed costs or other payoffs; final approval depends on the lender's valuation and program requirements.

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.