With interest rates still relatively low, you may be considering refinancing your FHA loan to a conventional loan. Doing so can offer advantages such as a lower monthly payment, less interest overall and the chance to get rid of FHA mortgage insurance — but, just because you want to refi to a conventional loan doesn’t mean you’ll qualify, or that it’ll make sense against the cost.
Here’s what to consider.
When is it a good time to refinance an FHA loan to a conventional loan?
You can refinance an FHA loan to a conventional loan if you meet the minimum requirements for a conventional mortgage, which differ from FHA requirements. If your credit score has improved to at least 620 in the time since you took out your FHA loan, you may be able to qualify for a conventional loan, and one with a more competitive interest rate.
In general, if interest rates have dropped significantly, it makes sense to explore your options, whether that’s refinancing from an FHA loan to a conventional loan or sticking with your FHA loan and doing an FHA streamline refinance.
It’s also important to consider whether the money you save refinancing would outweigh the closing costs, which can be anywhere from 2 percent to 5 percent of your new loan balance.
Benefits of refinancing an FHA loan to a conventional loan
One of the main advantages of refinancing from an FHA loan to a conventional loan is the ability to eliminate FHA mortgage insurance premiums (MIP).
With a conventional loan, once your balance reaches 80 percent of your home’s original value, you can cancel private mortgage insurance (PMI). This option doesn’t exist in most cases for FHA loans, so you’ll continue to pay premiums unless you refinance to another type of loan.
If you refinance your FHA loan to a conventional loan and still have to pay mortgage insurance due to your equity level, you may find that the premium costs more now than what it cost for your FHA loan. Refinancing, however, may have lowered your monthly payments enough to compensate, and the tradeoff is that you’ll be able to cancel PMI, eventually, on the conventional loan.
- Conventional PMI: 0.58 percent to 1.85 percent, according to averages from the Urban Institute
- FHA MIP: 0.75 percent upfront and 0.45 percent to 1.05 percent yearly
Another benefit to refinancing your FHA loan to a conventional loan is that conventional mortgages allow you to tap up to 80 percent of your home’s equity through a cash-out refinance without paying mortgage insurance. Conventional loans also have higher loan limits, so you can take out a larger amount compared to an FHA loan.
Cons of refinancing from FHA to conventional
In addition to the possibility of paying PMI on a conventional loan, refinancing comes with closing costs, which can add up considerably. Before committing to a refinance, do the math to ensure it makes financial sense, both in terms of savings and affordability. Bankrate’s refinance calculator can help.
Alternative FHA loan refinancing
If refinancing your FHA loan to a conventional loan isn’t possible, you can still take advantage of lower interest rates by doing an FHA streamline refinance. This program offers a faster way to refinance your FHA loan because it does away with more stringent underwriting, such as the need to verify your income and credit or do an appraisal.
To qualify for an FHA streamline refinance, you’ll need to meet the following requirements:
- You have an FHA loan.
- You’ve made on-time mortgage payments in each of the last six months, and it’s been at least six months since your first payment was due and 210 days since closing on the initial loan.
- Refinancing results in a “net tangible benefit,” such as lowering your monthly payment or changing from an adjustable-rate loan to one with a fixed rate.
- You’re not looking to take any cash out.
- You’re able to continue paying FHA mortgage insurance.
Even with interest rates being favorable, it may not always make sense to refinance an FHA loan to a conventional loan if you don’t meet the requirements, can’t afford the closing costs, or both. If you can save money and eliminate mortgage insurance, though, this strategy might be a smart move. Be sure to carefully consider the pros and cons, estimate your costs and explore all of your options, including an FHA streamline refinance, so you make the best possible decision for your circumstances.