Refinance the FHA in conventional loan: a guide
Reasons to Refinance from FHA to Conventional Loan
Refinancing from FHA to conventional isn’t for everyone, but here are the most common reasons borrowers consider it.
Terminate mortgage insurance
The most important reason borrowers refinance an FHA loan into a conventional loan is to eliminate mortgage insurance. The FHA mortgage insurance premium is an insurance policy that you pay for, but it protects the lender if you stop making payments. All borrowers must pay the MIP regardless of their down payment.
Here’s how it works:
- If you invest at least 10% on the house, you pay an initial MIP and a continuous MIP for 11 years
- If you put less than 10% on the house, you pay an initial MIP and a continuous MIP for the life of the loan
Conventional loans also have mortgage insurance called private mortgage insurance or PMI. The difference is that each borrower pays a different amount based on their credit rating and loan-to-value ratio. The less you invest, the more PMI you pay.
However, homeowners can request that the PMI be waived once they owe less than 80% of the home’s original appraised value. For example, if the owner has made payments on time and there are no problems with the loan, most lenders will waive the PMI at 80%.
If owners do not request cancellation of the PMI, the lender should automatically cancel it once the borrower has reached 22% equity in the property or a loan-to-value ratio of 78% on the original appraised value of the property. the House.
However, if a borrower already has 20% equity in the home, they can refinance an FHA loan to conventional and eliminate mortgage insurance.
Lock in a lower interest rate
Borrowers often refinance to a conventional loan to take advantage of lower interest rates. Synchronizing refinancing from an FHA loan to a conventional loan when rates are lower than they are currently paying can save them money.
This works best when borrowers also improve their credit score since lenders base the interest rates charged on the borrower’s credit.
Here is an example of how lowering a mortgage rate can save a borrower money.
Jack has a loan of $255,000 at 5.1%. His monthly principal and interest payment is $1,384.52, and if he keeps the loan for 30 years, he will pay $243,427 in interest.
If Jack refinances his loan after 10 years, he will still owe about $208,000. Say he refinances at 4.5%
Cash in on your home equity
Another reason to refinance FHA into conventional is to tap into the equity in a home. For example, a cash refinance can help homeowners with home repairs or renovations, pay off debt, or invest in their retirement savings or education.
Homeowners need at least 20% equity intact, so this only works when they have a significant amount of equity in the house. Although there is an FHA cash-out refinance option, the additional MIP expense often makes it unaffordable.
Conventional loans do not require PMI on cash refinance loans because homeowners cannot borrow more than 80% of the home’s value.