Should You Refinance Your FHA Loan to a Regular Loan?

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Contributor, Benzinga
October 11, 2023

Thinking about refinancing your FHA loan to conventional mortgage loan? While refinancing does have its benefits, it’s not the best choice for everyone. Let’s take a look at a few of the reasons why you might want to refinance, why you shouldn’t refinance and a few of our favorite mortgage companies that offer conventional loan refinancing. 

Why You Should Refinance Your FHA Loan to Regular Loan

There are several advantages to refinancing your FHA loan into a regular loan. Here are a few key reasons to consider making the switch:

1. You Might Be Able to Get a Lower Interest Rate

Most people who take out an FHA loan do so because they have poorer credit or more debt and cannot qualify for a conventional mortgage loan. However, it may have been years since you originally got your FHA loan — and your financial situation might be significantly different now than it was when you got your loan. You might be making more money now thanks to a promotion, you may have made a major dent in your student loans or credit card debt or you might have focused on improving your credit score.

If you refinance a mortgage loan now with an improved financial situation, you might pay less in interest. Most conventional mortgage loans have lower interest rates than FHA loans, and your higher income or improved credit score can lower your interest rate even further. Look for low-interest loan providers when you consider your refinance options.

When you refinance, you might see an interest rate that’s just a few percentage points lower than your original mortgage. However, this can mean serious savings over the course of your loan refinance. Let’s take a look at an example.

Let’s say you have a $100,000 principal balance left on your mortgage loan — a 20-year term and a 4% APR. You have the option to refinance your mortgage loan with the same term and principal balance with an interest rate of 3.5%. If you don’t take the refinance, you’ll pay $45,435.25 in interest by the time you pay off the loan. If you do, you’ll pay $39,190.30. A difference of just half a percentage saves you over $6,000 by the time you pay off your loan. 

2. You Can Remove FHA Mortgage Insurance

FHA mortgages don’t require you to pay private mortgage insurance (PMI). However, they do require that you pay for FHA mortgage insurance both during your closing and every month in the form of a monthly premium. This mortgage insurance premium might cost you up to 1% of the total principal balance of your loan, depending on your loan term. This means that if you have a principal balance of $180,000, your monthly mortgage insurance might cost you up to $1,800 a year. Unlike PMI, this insurance never expires or cancels itself — you need to pay it every year until your loan balance is $0.

You may want to take out an FHA loan and refinance to a conventional loan when you reach 20% equity in your property. This allows you to cancel your FHA mortgage insurance and avoid paying for PMI on your conventional loan. 

3. You Might Be Able to Take Money Out of Your Home

Have you built significant equity in your home? When you refinance to a conventional loan, you might be able to save money and access your equity.

If you have more than 20% equity in your home, you can automatically remove your FHA mortgage insurance premium when you refinance to a conventional loan. However, if you have significantly more than 20% equity, you can also use a cash-out refinance to pay down other debts.

Mortgage loans are one of the most affordable ways to borrow money because they have interest rates that are much lower than credit cards and personal loans. When you take a cash-out refinance, you accept a higher principal loan balance and take the difference out in cash. You can then use that cash to pay down credit card debt or make extra loan payments. With a cash-out refinance from an FHA loan to a conventional loan, you might be able to save money in insurance and pay off your debt in one fell swoop. 

Why You Should Not Refinance Your FHA Loan to a Regular Loan

While refinancing to a regular loan may seem appealing, it is essential to understand the potential drawbacks that come with this decision. Here are some of them:

1. You Need to Meet Conventional Loan Standards

Not everyone will qualify for a conventional loan. In order to refinance your mortgage, you must meet the same standards you’d need to meet if you were taking out a new conventional loan. This means that you’ll typically need a credit score of at least 620 points and a debt-to-income (DTI) ratio of no more than 50%. If you don’t meet these standards, you’ll have a tough time finding a lender willing to service your refinance.

2. You Need at Least 20% Equity in Your Home

Many homeowners refinance their FHA loan because they don’t want to pay for monthly FHA mortgage insurance. But if you don’t have at least 20% equity in your home, your new lender will require you to pay PMI on your loan. PMI is very similar to FHA mortgage insurance — you pay a premium each month and receive no protection in return as the homeowner. However, PMI is typically much more expensive than FHA insurance and can add hundreds of dollars to your monthly payment.

Before you consider refinancing, check and make sure that you already have 20% equity in your home. If you aren’t sure how much equity you have, contact your lender and request a mortgage statement.

3. You Need to Pay Closing Costs Again

Just like when you bought your home, you’ll need to pay for closing costs when you refinance. Closing costs on a refinance typically cost between 2% and 3% of your total loan balance. This means that if you’re refinancing a $100,000 loan, you will usually need between $2,000 and $3,000 upfront to close your loan. If you don’t have the money for closing costs, consider waiting until you have the money to refinance.

Current Refinance Rates

Do you want to refinance your mortgage to get a lower interest rate? Let’s take a look at some of the best refinance mortgage companies and their current mortgage rates. 

Mortgage LenderCurrent Refinance Rate
Rocket Mortgage®3.886%
Chase3.466%
better.com3.535%
USAA3.543%
Bank of America3.646%

*rates as of 2/11/20

Best Mortgage Lenders for Refinancing

Now that you understand the benefits and drawbacks of refinancing, let’s take a look at some of the best places to refinance a mortgage loan. 

Rocket Mortgage
Best For
  • Online Mortgages
securely through Rocket Mortgage's website

1. Rocket Mortgage®®: Best for a Simple Refinance

Refinancing a mortgage can be confusing and frustrating. Rocket Mortgage®® is an online mortgage company that offers simple streamlined refinances. You can quickly apply for a refinance from your home computer or cell phone by following its easy-to-understand application process.

If you still aren’t sure if you’re ready to refinance, Rocket Mortgage®® also offers a comprehensive library of mortgage and refinance education tools and articles that can clear up any questions you have about the process. If you’re looking for the easiest way to refinance your FHA loan, be sure to consider a loan from Rocket Mortgage®®.

2. better.com: Best for Low-Interest Rates

better.com is the best mortgage company if you want to save as much money as possible by refinancing to a lower rate. It’s simple to quickly compare rates for multiple loan types — just enter a little information on your loan balance and your finances and you’ll see both interest rates and APRs update on a minute-to-minute basis.

better.com’s refinance rates are consistently lower than competing companies and it’s easy to check on changing rates from one week to the next, so you get the best rate. better.com even offers a “Better Price Guarantee,” where it’ll match more competitive quotes you receive from other refinance companies. 

3. Chase: Best for In-Person Service

Online mortgages are convenient — but if you’re less tech-savvy, they can also be a massive headache. If you’re looking for the reassurance and assistance that accompanies in-person meetings, consider refinancing your loan through Chase.

Chances are high that there’s a Chase bank near you — you can find over 5,000 branches across the United States. You can apply for a refinance in person at a Chase branch or you can begin your application online and finalize it at one of Chase’s branches. 

Refinance Requirements

When you apply for a refinance, you’ll need to meet your lender’s individual requirements. Let’s take a look at some of the requirements you’ll need to meet before you can refinance.  

  • Credit score: You’ll usually need a 620 credit score or higher to qualify for a refinance to a conventional loan.
  • DTI ratio: You typically need a DTI ratio of less than or equal to 50% to qualify for a refinance.
  • Equity: You must have at least 20% equity in your property to avoid paying for PMI when you refinance.
  • Appraisal: Like when you bought your home, you’ll usually need an independent appraisal when you apply for a refinance. This assures your lender that the value of your home hasn’t significantly decreased in the years since you bought your house.
  • Closing costs: Expect to pay about 2% to 3% of your loan value in closing costs. Your lender may or may not allow you to roll these expenses into your loan.

You’ll also need to provide your lender with financial documents when you apply for a loan. Some of the information you may need to show your lender include:

  • Your 2 most recent bank statement
  • Your last 2 W-2 forms
  • Your last 2 pay stubs
  • A credit report
  • If you’re self-employed

The specific process you’ll go through when you apply for a refinance will depend on your specific lender. 

Refinance Your Loan the Right Way

So, should you refinance your FHA loan to a regular loan? Refinancing your loan is a big decision. Before you decide to apply for a refinance, be sure to research both lenders in your area and the current costs associated with your loan. This will help you make the best decision for yourself and your family’s unique financial situation.  

Frequently Asked Questions

Q

How do I get pre-approved?

A

First, you need to fill out an application and submit it to the lender of your choice. For the application you need 2 previous years of tax returns including your W-2’s, your pay stub for past month, 2 months worth of bank statements and the lender will run your credit report. Once the application is submitted and processed it takes anywhere from 2-7 days to be approved or denied. Check out our top lenders and lock in your rate today!

Q

How much interest will I pay?

A

Interest that you’ll pay is based on the interest rate that you received at the time of loan origination, how much you borrowed and the term of the loan. If you borrow $208,800 at 3.62% then over the course of a 30-year loan you will pay $133,793.14 in interest, assuming you make the monthly payment of $951.65. For a purchase mortgage rate get a quote here. If you are looking to refinance you can get started quickly here.

Q

How much should I save for a down payment?

A

Most lenders will recommend that you save at least 20% of the cost of the home for a down payment. It is wise to save at least 20% because the more you put down, the lower your monthly payment will be and ultimately you will save on interest costs as well. In the event that you are unable to save 20% there are several home buyer programs and assistance, especially for first time buyers. Check out the lenders that specialize in making the home buying experience a breeze.

Disclaimer:

Get Ready for Take Off

Rocket Mortgage® is an online mortgage experience developed by the firm formerly known as Quicken Loans®, America’s largest mortgage lender. Rocket Mortgage® makes it easy to get a mortgage — you just tell the company about yourself, your home, your finances and Rocket Mortgage® gives you real interest rates and numbers. You can use Rocket Mortgage® to get approved, ask questions about your mortgage, manage your payments and more.

You can work at your own pace and someone is always there to answer your questions — 24 hours a day, 7 days a week. Want a fast, convenient way to get a mortgage? Give Rocket Mortgage® a try.

About Sarah Horvath

Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.