FHA loan vs Conventional loan

11 Replies

I currently have a FHA $200,000 loan with an interest rate of 3.375% with a pmi flat fee of .85% ($141) of original loan amount. I want get a conventional loan to drop my PMI payment of $141 per month. However, the conventional loan rate is currently about 4.25%.

Should I stay with my current FHA loan or switch to conventional loan?

I think you should do the FHA loan. You're only putting down 3.5% for the FHA loan right. Conventional you have to put 20%

It’s a math problem, do the math. You didn’t mention the value of the property or how many years you are into your current loan. If you’re 5 years into a 30 year loan and you refi to a 30 year loan, you just added 5 years of payments. If you’re not at 80% LTV or lower you’ll probably have to pay PMI if you refi to non-FHA. If you’re at 80% LTV maybe your current loan has a provision to drop the added fee. Do the work to find the answers. Do the financial analysis. If you don’t know how, then educate yourself. Plenty of free resources on BP.

Principal and interest for 200k at 3.375 is $884/mo. At 4.25 it's $983. All things being equal, the pmi is costing you more than the increase in interest will.

You will save approximately $100 each month + saving for interest deduction on your tax return. Even though the interest rate is higher you will save money on long run with conventional loan . 

Thank you so much for the advice.  Going conventional!

@Carlo Con if you are going to go Conventional, will you have to put money down or has the value of the property risen enough to make up the 20% down payment that would be required to get rid of the PMI?

If you would still have to come up with the cash to make it to 20%, I would suggest asking the servicer if you can make a principal payment that would bring you to the equivalent of what 20% would have been and see if that will rid you of the PMI that way. Then you get to save the $141/mo and keep the low interest rate!

@Donald S. undefined

My house is worth about $250k. That should cover the equity. However, the PMI can't be removed since it is for the life of the FHA loan. Only way to remove is by going conventional. Right?

3.375%+.85% = 4.225%, so you’re actually paying a lower effective rate right now with the FHA loan. 3.375 is a great rate for an FHA loan. $250k in value is going to put right on the dot at 80% LTV, and in my experience, borrowers tend to over estimate the value of their house. Appraisers look at value at lot differently than real estate agents/buyers/homeowners.

Also, you have to consider closing costs/fees. You probably aren’t going to get much lender credit at a 4.25% interest rate, so those costs/fees will either have to come out of pocket, or be tacked onto the loan (eating into that equity).

Any monthly savings that you will get, will come from extending that term back out to 30 years, as well as the additional interest that you can write off on your taxes.

Without seeing more specifics, I’m going to venture to say that the savings you’ll get from going to 4.25% probably won’t be worth the hassle or costs. Feel free to reach out if you’d like though, and I can go over the numbers with you in more detail or answer any questions you have.

My house is worth about $250k. That should cover the equity. However, the PMI can't be removed since it is for the life of the FHA loan. Only way to remove is by going conventional. Right?

As I stated in prior email, you need to do the research and analysis. In about 20 seconds of google searches I found that after 5 years and 78% LTV you can drop mortgage insurance for FHA. Don't know if this is true. Read your loan agreement. Research FHA loans. If you😆're not willing to become an expert then real estate is just a hobby.

If the loan was originated after 2013, MIP is attached to the loan for life if you put less than 10% down. If before 2013, 77% equity is required to remove it.

@Carlo Con , if you need a trustable loan officer, feel free to reach out.  I'm a lender licensed in CA.

Kind Regards,

Kathy Argento

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