With interest rates still relatively low, you may be considering refinancing your FHA loan to a conventional loan. This can offer benefits like a lower monthly payment, lower interest overall, and the ability to get rid of FHA mortgage default insurance – but, just because you don’t want to rely on it. a conventional loan that you will qualify for, nor that it’ll make sense in relation to the cost.
Here’s what to consider.
When is the right time to refinance an FHA loan into 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 the FHA requirements. If your credit score has improved to at least 620 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 it’s refinancing an FHA loan to a conventional loan or keeping your FHA loan and doing an FHA refinance. streamlined.
It’s also important to consider whether the money you save on refinancing would outweigh the closing costs, which can range from 2% to 5% of your new loan balance.
Benefits of refinancing an FHA loan to a conventional loan
One of the main advantages of refinancing 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% of your home’s original value, you can cancel private mortgage insurance (PMI). This option does not exist in most cases for FHA loans, so you will continue to pay the 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 level of equity, you may find that the premium now costs more than it cost for your loan. FHA. Refinancing, however, may have reduced your monthly payments enough to make up for it, and the trade-off is that you could eventually cancel out the PMI on the conventional loan.
- Conventional PMI: 0.58% to 1.85%, based on Urban Institute averages
- FHA MIP: 0.75% in advance and 0.45% to 1.05% per year
Another benefit of refinancing your FHA loan to a conventional loan is that conventional mortgages allow you to leverage up to 80 percent of your home’s equity through cash refinancing without paying for mortgage insurance. Conventional loans also have higher loan limits, so you can take out a larger amount compared to an FHA loan.
Disadvantages of refinancing from FHA to conventional
In addition to the ability to pay PMI on a conventional loan, refinancing comes with closing costs, which can add up considerably. Before committing to refinancing, do the math to make sure it makes financial sense, both in terms of savings and affordability. Bankrate’s refinance calculator can help.
Alternative FHA loan refinancing
While it is not possible to refinance your FHA loan to a conventional loan, you can still take advantage of lower interest rates by performing an FHA Simplified Refinance. This program offers a faster way to refinance your FHA loan because it eliminates more stringent underwriting, such as the need to check your income and credit or do an appraisal.
To be eligible for FHA Simplified Refinancing, you must meet the following conditions:
- You have an FHA loan.
- You’ve made on-time mortgage payments in each of the past six months, and it’s been at least six months since your first payment was due and 210 days since the original loan was closed.
- Refinancing translates into a “net tangible benefit,” such as lowering your monthly payment or going from a variable rate loan to a fixed rate loan.
- You are not looking to withdraw money.
- You can continue to pay for FHA mortgage insurance.
At the end of the line
Even with favorable interest rates, it doesn’t always make sense to refinance an FHA loan to a conventional loan if you don’t qualify, can’t afford closing costs, or both. If you can save money and eliminate mortgage insurance, this strategy might be a good idea. Be sure to carefully consider the pros and cons, estimate your costs, and explore all of your options, including FHA Simplified Refinancing, in order to make the best possible decision for your situation.