When you want to refinance your FHA loan, you may be able to choose between two loan types. You can refinance your current FHA loan with a new FHA loan. However, you may be able to refinance your current FHA loan with a new conventional loan too.
Both choices can help you lower your interest rate and monthly payments. However, refinancing an FHA loan with a conventional loan may offer you significant savings on your mortgage insurance costs when you have enough home equity. Read on to learn more about how you can refinance your FHA loan to a conventional loan.
Benefits of switching from an FHA to a conventional loan
There are two ways refinancing an FHA loan with a conventional loan can save you money on your mortgage insurance costs.
The first is that you can avoid paying a new upfront mortgage insurance premium (UFMIP). Most FHA homeowners will need to pay a new upfront mortgage insurance premium equal to 1.75% of the loan amount when they refinance with an FHA loan. Conventional loans do not have upfront mortgage insurance fees. As a result, you can avoid this cost if you choose a conventional loan rather than an FHA loan for your refinance.
The second is you may be able to stop making monthly payments for mortgage insurance. Current FHA homeowners need to pay monthly mortgage insurance premiums (MIP) for at least 11 years regardless of the value of their home’s equity. Private mortgage insurance (PMI) may be required for conventional loan refinances. But you may be able to avoid paying for PMI too.
When you refinance with a conventional loan, you are only required to pay for private mortgage insurance if your home’s equity is less than 20%. As a result, refinancing with a conventional loan might help you avoid mortgage insurance costs that you will have to pay if you were to refinance with an FHA loan.
Do you have enough home equity to stop paying mortgage insurance?
A good first step is to estimate the current value of your home’s equity and turn it into a percentage. To do this, check the current value of your home on sites like Redfin or Zillow. Keep in mind, these values are just estimates. When you refinance, your lender is likely to request a home appraisal as part of your application.
You’ll need your current mortgage balance, which you can find on your monthly statement, plus the balance of any other home loans you might have. Then the math is simple. Check out this sample calculation:
|Current fair market value||$300,000|
|Current mortgage balance||$225,000|
|Current balance on home loan||$0|
|Estimated home equity||$75,000|
In this example, the homeowner has $75,000 in home equity. To convert this into a percentage, divide $75,000 by $300,000 which is the current value of the home. ($75,000 ÷ $300,000 = 0.25 or 25%.) Because the value of the home equity in this example is more than 20%, the homeowner might qualify to refinance into a conventional loan and stop paying mortgage insurance!
Keep in mind you will need to complete a refinance application, provide documents, meet your lender's credit and financial standards to get your application approved, and probably pay closing costs when you refinance your FHA loan to a conventional loan. Also remember by refinancing, the total finance charges you pay may be higher over the life of the loan.