Suppose you owe $300,000 on a loan at 7.0%, and your principal-and-interest payment is about $1,996 a month. A conventional refinance quote comes back at 6.25% with private mortgage insurance (PMI) because you only have 10% equity. An FHA quote comes back at 5.99% with an upfront mortgage insurance premium (MIP) of 1.75% rolled into the balance and an annual MIP billed monthly. Illustration, using the FHA MIP schedule HUD has published for balances at or under $726,200 with an LTV above 95% (0.55% annually): the FHA loan starts at $305,250, costs roughly $1,828 in principal and interest plus about $140 in monthly MIP, so close to $1,968. The conventional loan runs about $1,847 plus PMI of, say, $110, so roughly $1,957. The lower rate lost, and the FHA mortgage insurance never leaves the loan the way PMI can. The cheaper-looking rate is not always the cheaper loan, and this is the kind of math Duane Buziak, NMLS #1110647, runs for homeowners every week.
Duane Buziak walks homeowners through seven decision strategies for the conventional refinance vs FHA refinance choice, ordered roughly the way a loan file actually gets sorted. All dollar figures below are labelled illustrations with computed math, not quotes. Rates, FHA MIP schedules, and loan limits change, so confirm current numbers before you act (as of 2026).
1. Start With Your Current Loan Type
The loan you hold today decides which doors are open before rates enter the picture. A homeowner who already has an FHA loan may qualify for an FHA Streamline, a reduced-documentation refinance that, under HUD guidelines, can be done without a new appraisal and often without re-verifying income. A conventional borrower moving into FHA gets none of that: full income documentation, an appraisal, and a fresh underwriting review. For a deeper look at how reduced-documentation programs differ from a standard file, see streamline refinance vs full refinance.
Illustration: a homeowner holds an FHA loan at 7.0% with a $300,000 balance. A Streamline to a lower rate needs no appraisal, so the file moves quickly and the home’s current value is irrelevant. A neighbor with a conventional loan at the same rate and balance who wants FHA is on the full-doc path, with the same paperwork a purchase would require.
To put this into practice:
- Pull your current note and closing date to confirm the loan type and when it was made.
- Count the payments you have made against HUD’s seasoning requirements for Streamline refinances (a minimum number of months since closing and payments made on time).
- Confirm the net tangible benefit test, which requires the new loan to measurably help you, typically through a lower combined rate-and-insurance payment.
- Get a full-documentation conventional quote to compare against the Streamline.
The common mistake is assuming Streamline speed applies when a conventional loan switches into FHA. It does not; the Streamline is only for existing FHA loans. Measure the total approval timeline and the number of documents each path requires. If one path asks for 30 days of paperwork and the other for a handful of pages, that gap belongs in your decision.
2. Compare Mortgage Insurance Over the Life of the Loan
Mortgage insurance is where the two loans diverge most. PMI is private insurance on a conventional loan; under the Homeowners Protection Act, as explained by the Consumer Financial Protection Bureau, it can be requested off at 80% of the original value and terminates automatically at 78% when you are current on payments. FHA MIP has two parts: an upfront premium (1.75% of the loan amount, usually financed) and an annual premium billed monthly. On most FHA loans originated with less than 10% down, MIP stays for the life of the loan; with 10% or more down, it can end after 11 years. Check HUD’s current rules, since schedules change.
Illustration on $300,000, comparing the first five years (assumed PMI of 0.45% annually; FHA annual MIP of 0.55%):
| Cost item | FHA | Conventional |
|---|---|---|
| Upfront premium (1.75%) | $5,250 (financed) | $0 |
| Starting balance | $305,250 | $300,000 |
| Annual insurance | about $1,679 (0.55% of $305,250) | $1,350 (0.45% of $300,000) |
| Monthly insurance | about $140 | $112.50 |
| Five-year insurance paid (approx.) | about $8,400 plus the financed $5,250 | about $6,750 |
| Can it be removed? | Usually not, unless 10%+ down | Yes, at 80% LTV request or 78% automatic |
To put this into practice, get itemized quotes for both loans, list the upfront and monthly insurance on each, apply the removal rules to your expected LTV path, and add up the five- and ten-year cost. The classic mistake is comparing only interest rates and ignoring the 1.75% upfront premium and how long MIP lasts. The number to track is cumulative insurance dollars paid at 5 and 10 years.
3. Use Your Credit Score to Predict Pricing
Conventional pricing is driven by loan-level price adjustments (LLPAs), published by Fannie Mae, which grow as credit scores fall and LTV rises. FHA pricing is comparatively flat across score bands, though lenders may add their own overlays at lower scores. The result is that the winner can flip by score band: strong credit favors conventional, while weaker credit with limited equity often narrows or reverses that advantage.
Clearly labelled hypothetical, same 85% LTV and a $300,000 loan: at a 760 score, conventional might price near 6.25% with modest PMI, producing a payment of roughly $1,847 plus about $75 of PMI. At 700, the rate might sit near 6.5% with higher PMI, around $1,896 plus $110. At 640, conventional could land near 7.0% with expensive PMI, around $1,996 plus $190, while FHA stays near 6.0% to 6.25% with its standard MIP and an all-in payment that now looks cheaper. These are not quotes; they show how the crossover works.
To find yours, check your score through a soft pull refinance pre-approval first, then request both quotes at the same LTV and compare the payment with insurance included. The mistake to avoid is applying with a hard pull at several lenders before you know which loan type fits. Measure the all-in monthly payment difference at your actual score, not at a score from a calculator default.
4. Check Equity and LTV Against Each Loan’s Ceiling
Loan-to-value (LTV) is your new loan balance divided by your home’s appraised value. It controls eligibility and insurance cost, and the 80% and 90% lines matter most. Conventional PMI disappears at 80% LTV on a new refinance, and conventional cash-out refinances cap at 90% LTV. FHA cash-out is limited to 80% LTV per HUD guidelines. FHA rate-and-term refinances can go much higher but carry MIP regardless. If you are weighing equity access, how cash-out refinancing works shows how these limits shape your options.
Illustration: a $400,000 home. With $340,000 owed, your LTV is 85%, so a conventional loan carries PMI. With $300,000 owed, LTV is 75%, so the conventional loan has no PMI at all, while an FHA loan on the same house would still charge both the upfront premium and annual MIP. Same house, same borrower, and the insurance picture flips because of equity alone.
Order or estimate a value, compute your LTV using the payoff plus any costs you plan to finance, and note the distance to the nearest breakpoint. If you are at 81%, paying down a few thousand dollars before closing could remove PMI entirely. The common mistake is using an old purchase price or an online estimate instead of an appraised value; an appraisal that comes in low can push you across a pricing line or cancel the deal. Understanding refinance appraisal requirements and waivers helps you plan for that risk. Measure your LTV at closing against the nearest pricing breakpoint.
5. Match the Loan to Your DTI and Documentation Profile
Debt-to-income (DTI) is your total monthly debt payments, including the new mortgage payment, divided by gross monthly income. Higher DTI or irregular income can make FHA easier to approve, since FHA underwriting is generally more flexible on ratios when the file has compensating strengths. Conventional loans often favor strong, well-documented profiles with lower DTI. If your income is not a simple W-2, the options for self-employed mortgage refinancing show how documentation changes the picture.
Illustration: a borrower consolidating credit card debt into a new loan. Gross income is $8,000 a month. After the refinance, the new mortgage payment is $2,400, and remaining debts (a car loan and student loan) total $1,280. That is $3,680 of debt, a DTI of 46%. Conventional automated underwriting might refer that file for manual review or require compensating factors, while FHA’s automated findings may approve it. The difference is not the borrower’s strength; it is each program’s tolerance.
To test it yourself:
- Calculate DTI with the proposed new payment included, not your current one.
- Gather two years of income documents, including tax returns and recent pay stubs.
- Ask for automated underwriting findings on both loan types so you see the approval type, not just a yes or no.
The usual errors are leaving out a co-signed debt, which lenders count even if someone else pays it, and ignoring a recent job change. Measure your DTI with the new payment and the underwriting approval type on each path.
6. Run the Break-Even Math on Closing Costs and Financed Premium
The break-even month is total closing costs divided by monthly savings. It tells you how long you must keep the loan before the refinance pays for itself. FHA adds a wrinkle: the financed upfront MIP enlarges the balance, which means more interest every month and a longer break-even than the headline payment suggests. A refinance break-even calculator makes this comparison easy to run for both loans.
Illustration: $6,000 in costs divided by $200 in monthly savings is a 30-month break-even. Now add a financed upfront premium of $5,250 on the FHA side. If that raises the balance and trims the real monthly savings to $140, break-even on $6,000 becomes about 43 months, and you have also added roughly $5,250 of principal you must eventually repay. The same loan looks very different once the premium is counted.
Build a table with rate, payment, insurance, costs, and break-even month for each loan, and test no-out-of-pocket closing options, where costs are covered through a slightly higher rate or lender credit. That trade shifts cost into the rate, so it lengthens the true cost over time; the average refinance closing costs breakdown shows what you are actually trading against. The mistake is ignoring the added interest on a financed premium or forgetting that lender credits come with a higher rate. Compare your break-even month against how long you realistically expect to keep the loan.
7. Plan Your Exit Before You Choose
How long you will stay, and whether you plan to refinance again, determines which insurance structure costs less. FHA MIP that lasts for the life of the loan is expensive if you hold for twenty years but may be tolerable if you expect to sell in four. A strategy of “FHA now, conventional later” depends on equity growing enough to remove insurance, and it carries a second set of closing costs. The framework in when it makes sense to refinance a mortgage is a useful companion for testing that plan.
Illustration: an FHA borrower plans to refinance into conventional after three years. Suppose the second refinance costs $5,500. The borrower paid roughly $5,250 financed upfront MIP plus about $5,000 of annual MIP across three years, then pays the $5,500 exit cost. The plan only wins if the conventional loan’s lower insurance later saves more than that combined total. Run the numbers, do not assume them.
To plan the exit:
- Set a realistic holding period in years.
- Project home value growth conservatively, and test a flat-value case too.
- Model the exit refinance cost, including appraisal and fees.
- Choose the loan that is cheaper over that period, not over the full 30 years.
The common mistake is assuming that rates and home values will make a later refinance free or certain. Neither is guaranteed. Measure total cost over your planned holding period, including any future refinance.
Where to Start: Strategies 1, 2 and 4 First
Run Strategies 1, 2 and 4 first: your current loan type, the mortgage insurance cost, and your equity. They eliminate one option fastest. If you hold an FHA loan with seasoning behind it, a Streamline may settle the question. If your LTV is 80% or below, conventional usually avoids insurance that FHA cannot. If equity is thin and insurance is similar either way, move on to credit pricing, DTI, and break-even math to confirm the winner.
Ready to discover how much you could save with Virginia’s top-ranked mortgage expert? Call (804) 212-8663 now for your free soft-pull rate analysis, no credit impact, no obligation, and find out if refinancing can lower your monthly payments or unlock your home’s equity.