FHA to Conventional: Making the Switch
- posted 8.20.2013
- Britany Linton
- Home Loans
Do you currently have an FHA-insured loan? If you've thought about refinancing, it may be in your best interest to see if switching to a conventional loan could save you money by eliminating your monthly mortgage insurance payments. Read more to learn about the potential benefits of making the switch.
FHA Mortgage Insurance Premium
FHA loans require that borrowers pay MIP, or Mortgage Insurance Premiums. Like all insurers, the Federal Housing Administration collects a premium which is the amount you pay for your mortgage insurance. These monies go into a fund called the Mutual Mortgage Insurance Fund and are used to pay the mortgage lender should a borrower go into default. MIP is broken down into a one-time payment called the Up Front Mortgage Insurance Premium (UFMIP), and the monthly mortgage insurance payments (MI).
Earlier this year, MIP increased. These MIP increases are consistent with the Federal Housing Administration's efforts to strengthen the Mutual Mortgage Insurance Fund.
Who Has to Pay MIP and for How Long?
Along with the increase in MIP, the FHA also changed the duration that borrowers must pay MIP. FHA will now collect annual MIP for the maximum duration permitted and change its long-standing Annual MIP Cancellation Policy. Certain homeowners can no longer cancel the annual MIP. The changes also reflect that regardless of the loan amount or LTV, every FHA borrower will have to pay MIP.
To learn more about these changes, check out our MIP Changes blog.
Eliminate MIP with a Conventional Loan
Conventional loans often do not come with the amount of provisions that FHA loans do. Conventional loans do not require mortgage insurance if the loan to value is less than 80%-in other words, if the borrower can make a down payment of 20%. So in theory, by switching to a conventional loan, you may be able to eliminate your monthly mortgage insurance payments.
Should You Make the Switch?
Before you consider a conventional mortgage refinance, you should find how much equity you have in your home. Make sure you have 20 percent equity or more so you are eligible for a conventional loan. With that being said, when refinancing from an FHA loan to a conventional loan, you may be getting the same interest rate as your current FHA loan, but you will in fact being paying less. The MI payments on your FHA loan add anywhere from $100-$500 a month. By switching to a Conventional loan, you will be completely eliminating these MI payments and saving yourself a couple hundred dollars a month.
When deciding what refinance is right for you, make sure to factor in the future of home prices and mortgage rates. You should also evaluate all costs and benefits. It might be easier for you to obtain an FHA loan, but no matter what you will have to pay monthly mortgage insurance. A Conventional loan requires a higher credit score and more equity in the home. After evaluating, you may find that your current FHA loan is already your best option or find that you would benefit from making the switch to a conventional refinance.
Of course guidelines will vary vendor to vendor but give us a call to have a licensed loan officer weigh out the differences and take you through all your options to see what is best for you.