FHA loans help a lot of people buy homes. They accept lower credit scores and smaller down payments than most conventional loans. But there's a cost that many borrowers don't fully think through until they're years into paying it: mortgage insurance that may never go away.

Refinancing from FHA to conventional is how many homeowners get out of that situation. If your home has gained value and your credit is solid, the switch can cut your monthly payment — sometimes by a lot. But the decision depends on a few key numbers. This guide walks through all of them so you can figure out if it's the right move for you.

FHA MIP vs. Conventional PMI: What's the Real Difference?

Both FHA loans and conventional loans can require mortgage insurance. But they work very differently — and that difference is why so many FHA borrowers eventually want out.

FHA loans carry two types of mortgage insurance. There's an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount, paid at closing. Then there's an annual MIP that gets split into monthly payments. Per HUD, as of March 20, 2023, FHA reduced its annual MIP to 0.55% for most 30-year loans. That sounds reasonable, but here's the catch: for most borrowers with less than 10% down, MIP lasts for the entire life of the loan.

Per HUD's Mortgagee Letter 2013-04, FHA loans with less than 10% down originated on or after June 3, 2013 carry mortgage insurance for the full loan term — meaning you pay it until you sell or refinance. There's no automatic cancellation. The only way to get rid of it is to refinance out of the FHA program entirely.

Conventional PMI works differently. According to the CFPB, private mortgage insurance (PMI) typically costs between 0.5% and 1.5% of the original loan amount per year. But it's not permanent. Lenders must cancel PMI automatically when your loan balance reaches 78% of the original home value. You can also request cancellation once you hit 80%.

So even if PMI costs a similar rate, conventional wins on timeline. You're not locked in forever.

How Much Equity Do You Need to Refinance From FHA to Conventional?

The short answer: at least 20% equity gets you the best outcome — no PMI on your new conventional loan. But you don't have to wait until you hit 20% to make the switch worthwhile.

We often see borrowers assume they need to wait until they hit exactly 20% equity. In practice, the better question is: does switching to conventional PMI cost less than your current FHA MIP? For many borrowers, the answer is yes — even at 85% or 90% loan-to-value.

Here's why. FHA MIP doesn't adjust based on your credit score. Conventional PMI does. A borrower with a 740 credit score might pay 0.3–0.5% for PMI on a conventional loan. That's often less than the 0.55% FHA MIP — and conventional PMI goes away once equity reaches 20%. FHA MIP doesn't.

According to the FHFA House Price Index, U.S. home prices rose 5.3% year-over-year as of Q2 2024. In markets like Colorado and Florida, appreciation has been even stronger. So many homeowners who bought three to five years ago now have significantly more equity than they started with.

A new appraisal determines your current home value — and that's required as part of every FHA-to-conventional refinance. The appraisal gives you an accurate picture of where you stand. If values in your area have climbed, your equity position may be better than you think.

What Lenders Look For When You Refinance

Refinancing to a conventional loan works like a new mortgage application. You'll go through full underwriting again. Here's what lenders review:

Credit score: Per Fannie Mae's Selling Guide, the minimum qualifying credit score for most conventional loan transactions is 620. That's the floor. A higher score — especially above 740 — gets you a better rate and lower PMI costs. So if your credit has improved since you took out your FHA loan, that works directly in your favor.

Debt-to-income ratio (DTI): Most conventional lenders want to see a DTI at or below 43–45%. That means your monthly debt payments (including the new mortgage) divide into your gross monthly income at 45% or less. You can review how DTI is calculated using the CFPB's DTI overview.

Income and employment: You'll provide W-2s, pay stubs, tax returns, and bank statements — the same documents you gathered for your original mortgage. If you're self-employed or have variable income, a lender familiar with complex income situations can be a big help.

Appraisal: Every FHA-to-conventional refinance requires a new appraisal. The lender orders it to confirm your home's current market value. That number determines your loan-to-value ratio and whether you'll need PMI.

Will Refinancing From FHA to Conventional Save You Money?

The answer depends on two things: how much your monthly payment drops, and what it costs to refinance. When you subtract one from the other, you get your breakeven point.

According to the CFPB, refinance closing costs typically range from 2% to 5% of the loan amount. On a $300,000 loan, that's $6,000 to $15,000. But most borrowers see closing costs in the 2–3% range when rates aren't at extremes.

Here's how the math works. Say your current monthly MIP payment is $165, and after refinancing you'd pay $0 in PMI (because you've reached 20% equity) plus get a slightly lower rate. Your monthly savings might be $200. If closing costs total $4,000, you'd break even in 20 months. After that, every month is pure savings.

The table below shows how breakeven changes at different savings levels, assuming $4,000 in closing costs. This covers a common scenario — a loan in the $200,000 to $250,000 range at roughly 2% closing costs.

If you plan to stay in the home past your breakeven point, refinancing likely makes financial sense. But if you might move within a year or two, the closing costs may not be worth it.

One more note: you can sometimes roll closing costs into the new loan balance. That keeps your out-of-pocket costs at zero on closing day, but it does raise your loan amount and monthly payment slightly. Run both versions of the math before you decide.

When Does It Make Sense to Make the Switch?

Not every FHA borrower is ready to refinance right now. But several situations make it a strong candidate to explore. In our experience working with Colorado and Florida borrowers, these are the clearest signals:

• Your home has appreciated. Rising values push your equity up without any extra payments. If you bought a few years ago in a growing market, your LTV may already be at or below 80%.
• Your credit score has improved. FHA loans are available with scores as low as 580. But conventional loans reward higher scores with lower rates and cheaper PMI. If your score climbed from 640 to 720 since you bought, that's a meaningful difference in what you'll qualify for.
• You're locked into FHA MIP for life. If your FHA loan closed after June 3, 2013 and you put less than 10% down, MIP stays until you refinance or sell. That's a strong reason to look at your options now — especially if you've built equity.
• You want cash-out flexibility. Conventional cash-out refinancing offers more options than FHA — including for second homes and investment properties. FHA cash-out is limited to primary residences only.
• Market rates are favorable. If rates are lower than your current FHA rate — or if your improved credit score gets you a better rate than you'd qualify for before — the savings stack up fast.

What the Refinance Process Looks Like

Refinancing from FHA to conventional follows the same basic steps as refinancing any mortgage. It's not a shortcut process — you go through full underwriting again. But it's also not dramatically different from what you did when you bought your home.

Here's what to expect:

Step 1 — Check your numbers first. Before you apply, pull your credit report, get a rough estimate of your home's value, and calculate your current LTV. This tells you whether you're in striking distance of 20% equity and gives you a realistic picture of what rate you might qualify for.

Step 2 — Apply with a lender. You'll submit a full mortgage application. The lender reviews your credit, income, assets, and debt. If you're working with a Colorado mortgage broker or a Florida-based team, they can shop your file to multiple lenders to find the best combination of rate, PMI cost, and closing costs.

Step 3 — The appraisal. Your lender orders an appraisal of your home. This is the number that sets your official LTV and determines whether you'll need PMI. Because it's based on current market value, not your original purchase price, appreciation works in your favor here.

Step 4 — Underwriting and closing. Once the appraisal comes back, underwriting reviews the full file. Most refinances close within 30 to 45 days of application. At closing, you'll pay any out-of-pocket closing costs — or they get rolled into the loan if you've arranged that in advance.

The whole process is straightforward when your paperwork is organized and your numbers are solid. Because lenders will verify your income, have your two most recent pay stubs, tax returns, and bank statements ready to go before you start.

Frequently Asked Questions