Should I Refinance Out of FHA Mortgage Insurance When Rates Are Higher? Ask the Concierge

Ask the Concierge is a reader-question column. Letters are edited and details changed. General educational information, not legal, tax or financial advice. Run your own numbers with a lender before acting.

Dear Concierge,

We bought our house in Fort Washington in 2021 with an FHA loan at 4 percent. I just looked at the statement and we're paying about $300 a month in FHA mortgage insurance, and I've read it never goes away. A lender told me we have enough equity now to refinance into a conventional loan with no mortgage insurance at all. Rates are higher, sure, but $300 a month is $3,600 a year. Wouldn't we come out ahead?

Paying for Nothing in Fort Washington

Dear Paying,

You've spotted something real, and you've reached the wrong conclusion from it. Let me show you why, because the reasoning is the useful part, and then I'll show you the version of your situation where the answer flips to yes.

First, what you're actually paying

FHA charges two premiums. There's an upfront one, 1.75 percent of the loan, that was rolled into your balance in 2021 and is gone. Then there's the annual premium, split into twelve monthly pieces, which is the $300 you're looking at.

Because you closed before March 2023, your annual rate is 0.85 percent of the balance. Buyers who closed after that date pay 0.55 percent, after HUD cut the premium. Either way, on a 30-year FHA loan with less than 10 percent down, the premium runs for the life of the loan. It doesn't cancel at 80 percent equity the way conventional mortgage insurance does. The only exits are selling or refinancing.

So your instinct is right: you're paying an insurance premium on a house you now have plenty of equity in, and it's never going to stop on its own.

Why you'd still lose money

Here's the mistake. You're comparing $300 a month of insurance against zero. The real comparison is your whole payment now against your whole payment after, and the rate difference dwarfs the insurance.

Let me use round numbers that fit your letter. Say the original loan was about $410,000 at 4 percent and the balance is now around $370,000. As of Freddie Mac's Sept. 3 survey, the 30-year conventional rate averaged 6.71 percent. Call it 6.75.

You'd pay about $180 more every month, spend $8,000 to $10,000 in closing costs to do it, and reset the clock to a fresh 30 years. The $3,100 a year in insurance you'd save is eaten by roughly $10,000 a year in additional interest. Your lender isn't lying to you about the equity. They're just not showing you the second column.

The rule of thumb: dropping FHA insurance only pays if the new rate is within about the insurance rate of your old one. You're paying 0.85 percent. If conventional rates were 4.85 percent or lower, we'd talk. At 6.75, you keep the 4 percent loan and you keep it happily. That rate is the most valuable thing you own after the house itself.

What you can do instead

Two things, neither of which costs you the 4 percent.

Pay the insurance down instead of away. Every extra dollar toward principal reduces the balance the 0.85 percent is charged on, and it comes off the back end of a 4 percent loan, which is a fine place to park money.

And set an alarm, not a plan. If the 30-year ever gets within about three quarters of a point of your rate, that's the day this conversation changes. Until then, the honest answer is no.

The letter where the answer is yes

Now the flip side, because I got a second letter the same week that looks almost identical and comes out the opposite way.

Dear Concierge,

We bought in Bowie in late 2023 with FHA, 3.5 percent down, at 7.25 percent. The house has gone up and we've paid some down. Same question: refinance to conventional or not?

Late to the Party in Bowie

Dear Late, you're the one this refinance was built for.

Your FHA insurance is the lower 0.55 percent, but your rate is above today's market, not below it. Say the original loan was $412,000 and the balance is now about $400,000 on a house worth around $470,000. That's roughly 85 percent loan-to-value, so a conventional loan would still carry private mortgage insurance, but at a lower rate, and it cancels once you cross 80 percent.

That's about $280 a month, or $3,400 a year, on the same balance. With $8,000 to $10,000 in closing costs, you're whole in under three years, and the private mortgage insurance falls off a couple of years after that while the FHA premium never would have. If you're staying four or more years, do it. If you had 20 percent equity, the second column loses the $117 entirely and the case gets stronger.

Same county, same loan program, same question. One reader's rate is below the market and the other's is above it. That single fact decides it.

Three other times it can make sense even at a higher rate

You need cash out anyway. A cash-out refinance for a roof, a kitchen, or paying off 24 percent credit cards is its own decision. If you're doing it regardless, leaving FHA at the same time is a free bonus.

You need someone off the loan. Divorce, a co-signer parent, a sibling you bought with. The refinance is required to remove them, so the insurance question is secondary.

You put 10 percent or more down. Then your FHA premium ends after 11 years on its own, and refinancing to kill it early rarely pencils.

"Why am I buying title insurance again?"

Both readers will ask this at closing, so here it is once.

The policy that protects you, the owner's policy, was bought when you purchased and stays in force as long as you or your heirs own the home. You are not rebuying that.

The lender's policy is different. It protects the lender's lien, it lasts only as long as the loan it insures, and when you refinance, that loan is paid off and a new one is created. The new lender, and the investor it will sell the loan to, wants a new policy on the new loan. That's the one on your closing statement.

Why a new one, if it's been two years? Because things attach to title between closings: a home equity line, a contractor's lien, a judgment, a tax lien. The lender has no way to know unless the title company searches again and insures the result.

The part nobody volunteers: you're owed a discount. Title companies offer a refinance rate, sometimes called a reissue or short-term rate, when the property was insured recently. Ask for it by name. And in Maryland, a refinance of your principal residence is generally exempt from recordation tax on the amount of the existing balance, which takes a real bite out of the closing bill compared with what a buyer would pay. The District and Virginia have their own refinance treatment; your title company will quote it.

Whichever way your numbers fall, get the closing cost estimate before you get attached to the payment. The break-even is the whole decision.

Travell

Have a question for the column?

If you're buying in Prince George's, Montgomery County, the District or Northern Virginia and weighing FHA against conventional from the start, the 60-Second Buyer Guide covers what each one costs you over time, not just at closing.

If the refinance math doesn't work and you're wondering whether selling and buying with today's equity does, the 60-Second Smart Selling Options guide lays out the paths side by side. And request your Home Wealth Snapshot for a current value and a look at where your equity actually sits, no listing required.

Travell Eiland, Broker Associate, The Concierge Agency. Making Real Estate Dreams Come True.