How do I refinance from an FHA loan to a conventional loan, and is it worth it?
The short answer
You refinance into a new conventional loan that pays off the FHA loan. It's usually worth it when you have about 20% equity, because conventional loans don't need mortgage insurance at that point, and your credit has improved. The math has to beat the closing costs, especially if your current rate is low. The Mortgage Advisory is the direct lender on conventional loans in California, Texas, and Colorado and runs the break-even for you.
Why do people refinance out of FHA?
Mostly to get rid of FHA mortgage insurance, which usually lasts the life of the loan if you put less than 10% down. A conventional loan with at least 20% equity has no mortgage insurance at all. See how to get rid of FHA mortgage insurance.
What do I need to qualify?
- About 20% equity based on a new appraisal to skip mortgage insurance (less equity can still work with PMI, which may be cheaper than FHA's)
- A credit score of about 620 or higher, and better pricing above 700
- Steady income and a reasonable debt load
- On-time payments on your current mortgage
When is it worth it?
Compare what you save each month with what the refinance costs:
- Monthly savings = the FHA mortgage insurance you drop, plus or minus any change in rate
- Break-even = closing costs ÷ monthly savings
If you'll stay in the home well past the break-even, it's usually worth it. If your FHA rate is much lower than today's rates, a higher new rate can wipe out the savings, so do the math first.
What if my rate is already low?
Then it may make sense to wait, or to pay down the loan and let values rise until the numbers work. Sometimes the best advice is "not yet."
Example scenario (illustrative)
A homeowner in Aurora bought with FHA four years ago. The home has risen in value, and they now have 24% equity and a 730 score. Refinancing into a conventional loan at a similar rate drops about $180 a month of FHA mortgage insurance. With about $5,400 in closing costs, they break even in about 30 months and plan to stay 10 years.
Our take
This is one of the most common "money left on the table" situations I see, but only when the numbers really work. I'll lay out the numbers honestly: your savings, your costs, and your break-even month, and I'll tell you if waiting is the better move.
Ace Ausar, Mortgage Banker · NMLS #1143018
The Mortgage Advisory, Inc. · NMLS #1549739
Reviewed by Ace Ausar, NMLS #1143018 · Updated
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