Pros and cons of refinancing an FHA loan, and which option fits you

Written by Samantha SheltonNMLS 1647301Updated October 2026

Refinancing an FHA loan can lower your rate, shorten your term, unlock equity, or end FHA mortgage insurance for good, but only one of those outcomes requires leaving FHA. Refinancing into a conventional loan is the only path that removes the FHA annual mortgage insurance premium, and it generally takes 20% equity to do it without picking up conventional PMI instead. Everything else you can do inside FHA.

Young family outside their starter home weighing the pros and cons of refinancing an FHA loan

The tradeoff is speed against savings. The FHA Streamline Refinance skips the appraisal and most of the paperwork, but keeps your mortgage insurance and caps cash back at $500. A conventional refinance ends the insurance but demands a full appraisal, full documentation, and enough equity to clear 80% loan-to-value. Freddie Mac tells homeowners to expect to spend 3% to 6% of their loan principal to refinance, so break-even decides which one is worth doing.

Learn how each FHA refinance path works, what it costs, and which one fits your equity and payment history. Start with our Refinancing & Home Equity guide or browse the full set of refinance situations.

Key takeaways:

Only a conventional refinance ends FHA MIP: On FHA loans with an original loan-to-value above 90%, the annual premium runs for the full mortgage term, and reaching 80% loan-to-value on a conventional refinance is the exit.
The streamline trades savings for speed: No appraisal and light documentation, but your MIP continues, cash back is capped at $500, and you need 210 days since your last closing plus six payments made.
Break-even decides it, not the rate: At Freddie Mac’s 3% to 6% of loan principal, a $270,000 refinance costs $8,100 to $16,200, so divide that by your monthly savings before you commit to anything.

What does it mean to refinance an FHA loan?

Refinancing an FHA loan means replacing your FHA-insured mortgage with a new loan, either another FHA loan or a conventional one, and paying the old balance off with the proceeds.¹ Your home doesn’t change hands and your equity doesn’t move. What changes is the rate, the term, the mortgage insurance, and sometimes the balance.

FHA borrowers land here for four reasons, and each points to a different product: a lower payment, an exit from the mortgage insurance premium, cash out of built equity, or a faster payoff. HUD’s overview of FHA loan programs covers what FHA insures on the purchase side; refinancing is where the rules change most. Our FHA loan tips cover the qualifying side.

Your FHA refinance options at a glance

Four paths exist, and they differ on four things: whether an appraiser walks the property, what happens to your mortgage insurance, how much cash you can take, and how long you’ve held the loan.

Option	Appraisal required?	Mortgage insurance outcome	Cash out allowed	Seasoning required
FHA Streamline Refinance	No	MIP continues; new upfront premium charged	$500 maximum	6 payments, 6 full months since the first payment due date, and 210 days from the prior closing
FHA rate-and-term refinance	Yes	MIP continues; new upfront premium charged	No	Owner-occupied 12 months to reach 97.75% LTV
FHA cash-out refinance	Yes	MIP continues; new upfront premium charged	Yes, up to 80% LTV	12 months of ownership and occupancy as principal residence
Refinance into a conventional loan	Yes	MIP ends; PMI applies only above 80% LTV	Yes, up to 80% LTV	None from FHA; conventional cash-out needs 6 months on title

Read it one column at a time and the decision makes itself. Need cash, and the streamline is out. Want the mortgage insurance gone, and FHA is out. Our deep dive on FHA streamline refinance loans covers the fastest path, and rate-and-term refinancing explains the middle option.

Pros of refinancing an FHA loan

The upside clusters in five places, and the biggest requires leaving the program.

You can end FHA mortgage insurance permanently

Reaching 80% loan-to-value on a conventional refinance ends FHA mortgage insurance outright, usually the largest single saving on the table. Duration is why it matters: on terms longer than 15 years, the FHA annual premium runs 11 years when your original loan-to-value was 90% or less, and the entire mortgage term when it was above 90%. Put 3.5% down and you started at 96.5%, so it never falls off.

Here’s the arithmetic. Say you bought a $300,000 home in Waterford with 3.5% down. Your base loan was $289,500 at 96.5% loan-to-value, so the annual premium runs 55 basis points for the life of the loan, about $1,592 a year or $133 a month in year one.² If the home now appraises at $360,000 and you owe $270,000, you’re at 75% loan-to-value, where a conventional refinance carries no mortgage insurance at all.

Hypothetical example, not an offer. Actual rates, costs and payments vary.

Conventional PMI also behaves differently above 80%: you can ask your servicer to cancel it once your balance is scheduled to hit 80% of original value, and the servicer must terminate it automatically at 78%. The CFPB explains how mortgage insurance works and when it ends, and our guide to mortgage insurance compares the two.

The streamline skips the appraisal entirely

An FHA Streamline Refinance requires no appraisal, which removes a fee and a risk at once: no appraiser decides your home is worth less than you think, and no low valuation kills the file two weeks in. In soft submarkets or thin condo markets, that’s worth more than the fee. Compare it with refinance appraisal requirements on every other option.

A lower rate or shorter term can cut total interest

Cutting your term from 30 years to 15 can eliminate six figures of interest on a mid-sized loan, inside FHA or on the way out. Credit moves too, so a borrower who closed with a 620 score and has since built a clean file may price better today. Track direction with Freddie Mac’s Primary Mortgage Market Survey, not a lender’s advertised number, and read refinancing to a shorter loan term before assuming shorter is better.

An FHA cash-out reaches 80% of your home’s value

An FHA cash-out refinance lets you borrow up to 80% of appraised value, the same ceiling conventional cash-out uses. On that $360,000 home with a $270,000 balance, 80% is $288,000, freeing roughly $18,000 before closing costs. FHA’s cash-out credit standards are more forgiving than most conventional programs, which is the argument for staying inside FHA even though the premium follows you.

Being underwater doesn’t automatically disqualify you

Because the streamline requires no appraisal, negative equity doesn’t block it the way it blocks every other refinance. HUD’s process looks at your payment history and existing FHA case, not a fresh valuation. That matters most if you bought at a peak, see how to refinance with negative equity.

Cons of refinancing an FHA loan

Six drawbacks show up repeatedly, and most are costs that land before the savings.

Closing costs run 3% to 6% of loan principal

Freddie Mac puts the cost of refinancing at 3% to 6% of your loan principal, or $8,100 to $16,200 on a $270,000 loan. Divide those costs by your monthly savings to get your break-even month: on the example above, $8,100 against $133 a month is roughly 61 months, and at the top of the range it’s over 10 years. Rolling costs into the balance just moves them into your interest. The CFPB’s walkthrough of comparing Loan Estimates across lenders shows what each lender actually charges, and refinancing closing costs breaks out the line items.

Hypothetical example, not an offer. Actual rates, costs and payments vary.

The streamline keeps your MIP and charges a new upfront premium

Every FHA refinance charges a new upfront mortgage insurance premium of 1.75% of the base loan amount, and the annual premium continues. On a $270,000 balance that’s $4,725, typically financed. Partial refunds of your original upfront premium are available on FHA-to-FHA refinances within a limited window after your first closing, which softens the hit without erasing it. If ending mortgage insurance is the goal, the streamline can’t get you there, see refinancing to remove mortgage insurance.

The streamline caps cash back at $500

Cash in excess of $500 may not be taken out on a streamline refinance, which makes it useless for debt consolidation, renovations, or tuition. The $500 exists to reconcile escrow and payoff rounding. Need real money out of the house and you’re looking at an FHA cash-out, a conventional cash-out, or a second lien, each of which brings a full appraisal and full documentation back.

A new 30-year term can add interest even at a lower rate

Restarting a 30-year clock after seven years of payments means paying 37 years of interest on the same house. A lower rate on a longer runway can still raise your total, and the first years of a fresh amortization schedule are the most interest-heavy there are. The fix: ask for a quote on your remaining term, not just a new 30.

Cash-out and conventional refinances have stricter requirements

An FHA cash-out requires 12 months of ownership and occupancy as your principal residence before case number assignment, plus a full appraisal, income documentation, and a higher credit bar. Conventional refinances have no FHA seasoning rule, but a conventional cash-out needs a borrower on title for six months before disbursement and an existing first mortgage at least 12 months old, measured note date to note date, and the equity test is unforgiving: above 80% loan-to-value you’ve swapped FHA MIP for conventional PMI and gained nothing. Condo owners face project re-review on top.

Payment history can close the streamline door

Streamline eligibility turns on your recent record: all payments made within the month due for the six months before case number assignment, and no more than one 30-day late in the review period. Miss that and the easy option disappears, leaving a fully documented refinance where your score and debt-to-income ratio matter again. HUD also requires a net tangible benefit, defined by what happens to your rate and term, so a streamline can’t move you sideways.

How to decide which FHA refinance fits you

Three questions settle it: your equity, whether you need cash, and how long you’re staying.

An FHA streamline might work best if:

You have under 20% equity: Above 80% loan-to-value, a conventional refinance just swaps FHA MIP for conventional PMI.
Your payment history is clean: Six months of payments made within the month due keeps the non-credit-qualifying path open.
You want speed, not cash: No appraisal and light documentation close faster, and $500 is all you’ll see.

A conventional refinance might work best if:

You’re at 80% loan-to-value or lower: That’s where mortgage insurance disappears, and the only exit from FHA MIP on a loan that started above 90%.
You’ll stay past break-even: At $8,100 to $16,200 on a $270,000 loan, you need years in the house, not months.
Your credit has improved since closing: Conventional pricing rewards higher scores more sharply than FHA does.

An FHA cash-out might work best if:

You’ve owned and occupied for 12 months: That’s the FHA requirement, measured before case number assignment, not at closing.
You need more than $500: The 80% ceiling frees roughly $18,000 on a $360,000 home with a $270,000 balance, before costs.
Your credit is the limiting factor: FHA’s cash-out standards are generally more forgiving than conventional guidelines.

Honest answer: refinancing isn’t right for everyone, and holding off is always an option. If break-even lands past your likely sale date, doing nothing wins. Our refinancing guide and refinancing eligibility checklist help you pressure-test it first.

What Michigan homeowners should know

All 83 Michigan counties carry the same 2026 one-unit FHA limit of $541,287, and the state’s price points sit comfortably inside it, so most Michigan FHA borrowers reach this decision with room on both sides.

FHA’s floor sits well below the conforming baseline: That $541,287 FHA ceiling runs against a conforming baseline of $832,750, so near the top of the market a conventional refinance has room FHA doesn’t, see FHA loan limits.
MSHDA down payment assistance is a second lien you have to deal with: The MI 10K DPA Loan lends up to $10,000 at 0% as a non-amortizing second, deferred until you sell, transfer, or pay off the first mortgage. A refinance pays off that first mortgage, so the assistance is either repaid at closing or resubordinated by written agreement, and resubordination takes time and is never guaranteed.
Plan the second lien before you shop the first: Any junior lien must be paid off or formally subordinated before a new first mortgage can record in first position. Start that at application, not underwriting.
MSHDA’s first mortgage carries a 640 minimum credit score: If you bought with an MI Home Loan, your file already cleared that bar, so a conventional refinance may be closer than you’d guess.

How Align handles a hard refinance

Low equity, a credit setback or an unusual property can make a refinance look impossible at one lender and workable at another. Lenders add their own rules on top of the program's.

Samantha takes your file to the wholesale lender whose rules fit it, and if waiting is the better move, she tells you that instead.

Already have an offer from your current servicer or one of the big national lenders you see advertised? Bring us the Loan Estimate. We will compare it line by line and show you where we can do better.

Run a refinance break-even review FHA loans in Michigan

FAQ: Refinancing an FHA loan

Here are answers to common questions about refinancing an FHA loan.

Can you refinance an FHA loan to get rid of mortgage insurance?

Yes, by refinancing into a conventional loan once your balance is at or below 80% of your home’s value. On FHA loans that started above 90% loan-to-value with a term over 15 years, the annual premium runs the full mortgage term, and no FHA-to-FHA refinance removes it. That makes refinancing to remove mortgage insurance worth re-running yearly.

How soon can you refinance an FHA loan?

For an FHA Streamline, three conditions all have to be met: at least six payments made, six full months since your first payment due date, and 210 days from the closing date of the loan being refinanced. An FHA cash-out requires 12 months of ownership and occupancy as your principal residence. A conventional refinance has no FHA seasoning rule, though a conventional cash-out needs six months on title. Check your dates against refinancing eligibility.

Is an FHA streamline refinance worth the closing costs?

It depends on your break-even month. Divide your closing costs by your monthly savings, and if you’ll stay past that many months, it pays. The streamline helps on cost, since no appraisal means no appraisal fee, but Freddie Mac still puts refinance costs at 3% to 6% of loan principal. It stops making sense when a reset term adds more interest than the rate cut saves. See refinancing closing costs.

Can you take cash out with an FHA refinance?

Yes, but not through the streamline, which caps cash back at $500. An FHA cash-out lets you borrow up to 80% of appraised value with a full appraisal, income documentation, and a higher credit standard, after 12 months of ownership and occupancy. Conventional cash-out uses the same 80% ceiling with a six-month title rule. Our breakdown of the pros and cons of cash-out refinancing compares both.

The bottom line on refinancing an FHA loan

Refinancing an FHA loan is worth it when the path matches the goal. Only a conventional refinance at 80% loan-to-value or lower ends FHA mortgage insurance, and on a loan that started above 90% with a term over 15 years, that premium otherwise runs the entire mortgage term. The FHA Streamline is faster and needs no appraisal, but it keeps the premium, charges a new 1.75% upfront premium, and caps cash back at $500. With refinance costs at Freddie Mac’s 3% to 6% of loan principal, break-even is the number that settles it.

If you’re ready to see whether dropping FHA MIP actually pays on your file, talk to Align Lending. We’ll shop your scenario across our lender network and put the streamline and the conventional refinance side by side, with the break-even on both. Call 248-506-5727 or start online.

Footnotes:

1. Align Lending is not acting on behalf of or at the direction of FHA or HUD. FHA refinance seasoning, occupancy, payment history, loan-to-value and mortgage insurance premium requirements are set by HUD in Single Family Housing Policy Handbook 4000.1 and related Mortgagee Letters, and are subject to change. Return to text.

2. Example figures in this article are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. Your loan amount, premium, closing costs and break-even point depend on your application, your property’s appraised value, your program and market conditions, and will be itemized on your Loan Estimate and Closing Disclosure. Return to text.

Sources: FHA Streamline Refinance seasoning of at least six payments made, six full months since the first payment due date and 210 days from the closing date of the mortgage being refinanced measured at case number assignment; no appraisal requirement; the net tangible benefit requirement; the rule that cash in excess of $500 may not be taken out; non-credit-qualifying payment history of all payments made within the month due for the six months prior to case number assignment with no more than one 30-day late; maximum 97.75% loan-to-value on an FHA rate-and-term refinance for a principal residence owner-occupied for the previous 12 months; the FHA cash-out requirement of 12 months of ownership and occupancy as principal residence prior to case number assignment; minimum decision credit score bands of 580 and above for maximum financing and 500 to 579 limited to 90% loan-to-value; and the 96.5% maximum purchase loan-to-value and 3.5% minimum required investment, U.S. Department of Housing and Urban Development, Single Family Housing Policy Handbook 4000.1, Sections II.A.1, II.A.2 and II.A.8, and HUD’s Streamline Refinance program page. Maximum 80% loan-to-value and combined loan-to-value on FHA cash-out refinances, reduced from 85%, effective for case numbers assigned on or after September 1, 2019, HUD Mortgagee Letter 2019-11 (issued August 1, 2019). FHA upfront mortgage insurance premium of 1.75% of the base loan amount and annual premiums of 55 basis points above 95% loan-to-value and 50 basis points at or below 95% loan-to-value, with durations of 11 years at an original loan-to-value of 90% or less on terms greater than 15 years and the mortgage term above 90%, on base loan amounts at or below the national conforming loan limit, HUD Mortgagee Letter 2023-05, effective for case numbers endorsed on or after March 20, 2023. FHA loan program overview, 3.5% minimum down payment and one- to four-unit eligibility, U.S. Department of Housing and Urban Development. CY2026 FHA one-unit forward mortgage limit of $541,287 in all 83 Michigan counties and the $1,249,125 high-cost ceiling, effective January 1, 2026, HUD CY2026 FHA Forward Mortgage Limits dataset and HUD’s FHA Mortgage Limits lookup tool. 2026 baseline conforming loan limit of $832,750 for one-unit properties, Federal Housing Finance Agency. Borrower-requested private mortgage insurance cancellation when the principal balance is scheduled to reach 80% of original value, automatic termination at 78% of original value, termination the month after the midpoint of the amortization schedule, and the statement that FHA and VA mortgages have different requirements, Consumer Financial Protection Bureau and the Homeowners Protection Act, 12 U.S.C. § 4902. Expectation of spending 3% to 6% of loan principal to refinance a mortgage, My Home by Freddie Mac. Loan Estimate delivery within three business days of application and how to compare estimates across lenders, Consumer Financial Protection Bureau. Weekly average mortgage rate reporting, Freddie Mac Primary Mortgage Market Survey. Conventional cash-out requirement that at least one borrower have been on title for at least six months before disbursement, Fannie Mae Selling Guide B2-1.3-03. MI 10K DPA Loan of up to $10,000 as a 0%, non-amortizing second lien deferred until sale, transfer or payoff of the first mortgage, and the MI Home Loan minimum credit score of 640, Michigan State Housing Development Authority (michigan.gov/mshda).

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. FHA and conventional program rules, mortgage insurance premiums, loan limits and closing cost ranges change and vary by borrower, property and lender; confirm your figures with your Loan Estimate and Closing Disclosure and consult a qualified professional about your situation. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154, works with FHA-approved lenders, and is not acting on behalf of, endorsed by, or sponsored by FHA, HUD, Fannie Mae, Freddie Mac, MSHDA, or any government agency.