If you’ve been thinking about refinancing, it might be in your best interest to see if switching to a conventional loan can save you money by eliminating your monthly mortgage insurance payments. Can you refinance an FHA loan for a conventional loan?
FHA loans vs. Conventional loans
First time buyers often prefer FHA loans because the requirements for down payments are not as stringent. But the Federal Housing Administration usually requires borrowers to pay a one-off advance mortgage insurance (MIP) premium, which accounts for 1.75% of the loan value. You will also be responsible for paying the annual premium that is built into the loan repayment.
When you convert an FHA loan into a conventional loan, you probably won’t have to worry about paying for your mortgage insurance if your home equity exceeds 20%. The end result may be lower monthly payment and large savings. And if you could keep that money in your pocket every year, you can get it into other debts, build an emergency fund or save for retirement.
FHA mortgage insurance premium
FHA loans require borrowers to pay MIP or mortgage insurance premiums. Like all insurers, the Federal Housing Administration charges a premium, which is the amount you pay for mortgage insurance. These funds go to a fund called Mutual Mortgage Insurance Fund and are used to repay the mortgage lender in the event of default of the borrower. MIP is divided into a one-off payment called Up Front Mortgage Insurance Premium (UFMIP) and monthly mortgage insurance (MI) payments.
Refinancing with an FHA loan (pros and cons)
Pros
- Lower PMI payments
- Delete PMI if LTV is below 78%
Cons
- Required to cover closing costs (1% -5% of the loan amount)
- More stringent credit and income qualifications
- Closing costs
One of the disadvantages of refinancing an FHA loan for a conventional loan is closing costs. Closing costs are fees charged by lenders for a loan. The average closing costs range from 1.5% to 3% of the loan amount. For a $ 200,000 mortgage, closing costs can reach up to $ 6,000. For refi to make sense, you should set your savings to over $ 6,000 on a new mortgage.
If you are not sure whether conventional or FHA refinancing is the best, look at what the lender offers. By weighing mortgage costs and adding closing costs, you can find out which option will save you the most money.
If you need additional help making this decision and other financial health related issues, you may want to consider hiring a financial advisor. Finding the right financial advisor tailored to your needs doesn’t have to be difficult.
