Many homeowners who purchase their home with an FHA (Federal Housing Administration) loan wonder if they should refinance into a conventional mortgage when their finances improve. As with many refinance decisions, it depends. In this post, we’ll discuss the pros and cons of making the change.

The only way to remove PMI

Unlike a conventional mortgage, you cannot simply eliminate Private mortgage insurance (PMI) when your loan to value ratio drops below 78%. To remove PMI, you must refinance and switch to a conventional loan. Not having to pay a PMI premium again can add up to significant financial savings over time.

PMI premiums are lower with a conventional loan

Even if you have yet to pay down your loan enough to avoid PMI entirely, it’s possible that you could still save every month with lower insurance premiums. PMI is cheaper on a conventional loan for the same loan amount, and unlike an FHA loan, you can have PMI removed without refinancing.

What about closing costs?

PMI savings are great, but it’s important to remember that refinancing your mortgage isn’t free, there are closing costs to consider.

Look at interest rates

Your interest rate will be affected by your decision to refinance. Typically, conventional loans will offer slightly lower interest rates than FHA loans, but the current rates in the market will be the true determining factor. If the new rate is lower, this adds to the benefit of refinancing. If the rate is the same, or higher, then you may not save enough removing PMI to make it worth your while.

How do I know if I qualify?

If you have increased your income, lowered your debt, improved your credit score and built equity in your home, there’s a good chance that you will now qualify for a conventional mortgage. The only way to know for sure is to apply. A mortgage broker can assist with the application and then compare your current FHA loan with a future conventional loan to determine if refinancing is right for you.

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