Should You Refinance Out of Your FHA Loan to Eliminate Mortgage Insurance?

Most homeowners think about refinancing to get a lower interest rate. But there’s another reason to refinance that often gets overlooked — eliminating FHA mortgage insurance. In some cases, refinancing from an FHA loan into a conventional mortgage can actually lower your monthly payment even if your new interest rate is higher.

If you have an FHA loan from 2019 through 2022 — when rates were historically low — this scenario may apply to you right now.

Why FHA Mortgage Insurance Is Different

FHA loans require two types of mortgage insurance:

• Upfront MIP (UFMIP): 1.75% of the loan amount, financed into the loan at closing
• Annual MIP: Paid monthly as part of your mortgage payment

For most FHA loans originated after June 2013, annual MIP is required for the life of the loan — it does not automatically cancel when you reach 20% equity the way private mortgage insurance (PMI) does on conventional loans. The only way to eliminate it is to refinance out of the FHA loan entirely.

This is the key difference that makes refinancing out of FHA worth considering even when rates are higher than your current rate.

How Refinancing Out of FHA Can Lower Your Payment

Here’s how the math works. Let’s say you have an FHA loan with a 3.5% interest rate. Your monthly payment includes principal and interest — but it also includes annual MIP, which for many borrowers adds $100 to $200 or more per month depending on the loan amount.

If you refinance into a conventional loan at a higher rate — say 6.5% — but eliminate the monthly MIP entirely, your total monthly payment could actually be lower than what you’re paying today.

Whether this makes sense depends on several factors:

• Your current loan balance and remaining term
• Your current MIP amount
• Current conventional rates and your pricing based on credit score and LTV
• How much equity you have — you’ll need at least 20% to avoid PMI on the new conventional loan, or be prepared to pay PMI until you reach that threshold
• How long you plan to keep the mortgage — the breakeven point matters

The only way to know for certain is to run the numbers side by side for your specific scenario.

Who This Strategy Makes the Most Sense For

Refinancing out of FHA to eliminate mortgage insurance is worth exploring if:

• You have an FHA loan with a rate in the 3s or low 4s and your home has appreciated significantly since you bought
• Your loan-to-value ratio is now at or below 80% — meaning you have at least 20% equity
• Your credit score has improved since you got your FHA loan, which could qualify you for better conventional pricing
• You plan to stay in the home long enough to recoup the cost of refinancing
• You want to simplify your mortgage and eliminate the permanent MIP requirement

It may not make sense if:

• You don’t yet have 20% equity and would need to pay PMI on the new conventional loan — though even in this case, conventional PMI is typically cancellable once you reach 20% equity, unlike FHA MIP
• You plan to sell or pay off the home in the next few years and won’t recoup the closing costs
• Your credit score or DTI would result in significant LLPAs that offset the benefit of dropping MIP

What About Homeowners Who Bought in 2020 or 2021?

Many Washington State homeowners purchased with FHA loans during the low-rate environment of 2020 and 2021. If that’s you, here’s what to consider:

Home values in the Seattle area and across Washington State have increased substantially since then. Many homeowners who put 3.5% down at purchase may now have 20% or more in equity simply due to appreciation — without having paid down very much principal.

If that describes your situation, you may be sitting on enough equity to refinance into a conventional loan, drop MIP entirely, and potentially end up with a similar or lower total payment even at today’s rates. It’s worth a conversation to find out.

The Breakeven Calculation

Any refinance has closing costs — typically ranging from 1% to 2% of the loan amount depending on the scenario. Before refinancing, it’s important to calculate your breakeven point — how long it will take for the monthly savings to offset the cost of refinancing.

For example, if refinancing costs $5,000 and saves you $200 per month, your breakeven is 25 months. If you plan to stay in the home beyond that point, refinancing likely makes financial sense.

A good loan officer will run this calculation for you as part of the initial conversation — before you commit to anything.

Other Options Worth Considering

Refinancing out of FHA into conventional is not the only path. Depending on your situation, other options may include:

• FHA Streamline Refinance: If rates have dropped since you closed, a streamline refi within FHA can lower your rate and payment — though MIP remains. Learn more about FHA Streamline Refinancing here.
• Conventional refinance with PMI: If you don’t yet have 20% equity, a conventional loan with cancellable PMI may still be preferable to permanent FHA MIP — depending on the numbers.
• Waiting for more equity: If you’re close to 20% but not quite there, it may make sense to wait a bit longer before refinancing to avoid PMI entirely.

A Real Conversation Beats a General Answer

Whether refinancing out of your FHA loan makes sense depends entirely on your specific numbers — your current rate, loan balance, MIP amount, home value, credit score, and how long you plan to stay. There is no universal answer.

What I can tell you is that many FHA borrowers are surprised when they run the numbers and discover that refinancing into a higher rate actually saves them money once MIP is removed from the equation. It’s one of the most counterintuitive — and underutilized — refinance strategies available.