An FHA loan can help you purchase a home long before you could do so with a conventional mortgage. An FHA loan requires you to put less money down up front, but it also requires private mortgage insurance. These payments can run several hundred dollars a month, effectively dampening your enthusiasm about your new home. If you have the means, you can refinance to a conventional loan. It will cost more, but you'll save the PMI.
Conventional Loan Benefits
A major reason to opt for a conventional loan is the elimination of PMI. Getting rid of it can save you hundreds of dollars every month. Additionally, a conventional loan offers you greater term flexibility. You can obtain a fixed rate of anywhere from 10 or 30 years. You can also get an adjustable rate mortgage, an option unavailable on FHA loans. Whatever your reason, if you can come up with the difference, refinancing can be right for you.
Refinancing to Conventional
You've hit your limit with your PMI. Fortunately, you've been able to save enough to pay your mortgage down to 80 percent of the value of your home. While you do have the option of simply making a principal payment that would lead your lender to cancel PMI, you may be able to get a better rate by refinancing. Unfortunately, the only scenario where you can refinance from an FHA loan to a conventional loan is if you've managed to save quite a bit of money or if your house has appreciated in value to help you close the gap.
Applying to Refinance
Research lenders to see which one offers the best rates and terms. Once you've found the right match, request an application for a conventional mortgage. Enter your loan amount as no more than 80 percent of the value of your home. So if your house is worth $300,000, the maximum conventional mortgage will be $240,000. Provide the lenders with copies of Forms W-2, tax returns and pay stubs. It may also require a current bank statement showing that you have the funds to pay the difference between the FHA and conventional loan amounts. While the lender's primary concern is that you make your monthly payments, there's a good possibility that it will want to see that you can make a large lump-sum payment at closing.
When you're approved for the loan, you'll receive a commitment letter outlining the terms and conditions. Sign and return the letter, then set a closing date. Request from your current lender a payoff figure that is good through the date of closing. At closing, bring a cashier's check or certified check for the funds you will have pay to bring the balance down to conventional levels. Once you sign the documents, the lender will forward the funds to pay off the loan and your FHA loan will be replaced by a conventional mortgage
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.