The Quick Read: The switch works when your loan balance is low enough, compared with your home’s appraised value, that a conventional lender will take the loan and the mortgage insurance cost drops. At 80% loan-to-value or lower, conventional loans generally carry no private mortgage insurance. Above 80%, you can often still qualify, but you will pay for PMI. Equity decides the price of the move, not just whether you can make it.
Key Takeaways
- FHA mortgage insurance does not fall away just because your equity grows. On many loans with a small down payment, it lasts for the life of the loan.
- Refinancing into a conventional loan is the main exit that does not depend on how much you put down originally.
- Your loan-to-value ratio (LTV) tells you which tier you land in: no PMI, reduced PMI, or not worth it yet.
- A conventional refinance is a full new loan. Expect a review of income, credit, debts and an appraisal.
- The decision comes down to break-even: closing costs against the monthly savings, over the years you will keep the loan.
Why Do Borrowers Leave FHA in the First Place?
Mortgage insurance is the reason. FHA charges an upfront premium of 1.75% of the base loan, usually financed into the balance. It also charges an annual premium between 0.15% and 0.75% of the balance, depending on term, loan amount and LTV.
Refinance savings and break-even estimate
The starting figures are an example value with a balance in proportion and a placeholder for costs. Replace them with yours, and enter the current rate from your statement.
Editable benchmark: 7.32% as of October 22, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $245,000 current balance, a current rate you enter and a remaining term seeded at twenty-five years, closing costs seeded at $5,000 as an editable placeholder (not a fee quote) and rolled into the new loan, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The new rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a refinance quote; a refinance is priced by the lender at lock, and the current rate, the remaining term and the closing costs are figures you enter. The current payment is estimated from the balance, the current rate and the remaining term; the break-even divides the closing costs by the monthly saving and ignores the interest effect of a longer term. On the VA IRRRL the funding fee is added to the loan unless the veteran is exempt. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages; Lendmire is a broker, never the lender.
Here is the part that surprises people. On a thirty-year FHA loan above 90% LTV at origination, the annual premium lasts for the term. At or below 90%, it ends after eleven years. Most buyers use FHA loan programs precisely because they have little down payment. So most of them fall into the first group. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
Paying the balance down later does not change which schedule applies. Neither does a home that has appreciated. You can owe 60% of what the house is worth and still pay the premium.
That is the case for refinancing. A new conventional loan resets the rules, and PMI, if it applies, can come off on its own. Conventional PMI works on a different clock, which we cover below.
How Much Equity Is "Enough"?
"Enough" is not one number. It depends on what you want the new loan to do. Equity is the home's value minus what you owe, and LTV is the loan balance divided by the appraised value. A balance of 85% of value means 85% LTV and 15% equity. Final terms depend on lender guidelines, property type, leverage, and the borrower's complete credit picture.
If you only want to pay off the FHA loan and the closing costs, you can qualify at a much higher LTV than if you want cash back. If your goal is no mortgage insurance at all, the target is 80% LTV or lower. That is general industry practice, not a federal rule. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
| Your situation | Typical LTV | What usually happens |
|---|---|---|
| Comfortable | 80% or lower | Conventional loan, generally no PMI |
| Borderline | Above 80%, below the program ceiling | Qualifies in many cases, with PMI |
| Short | Near or at the program ceiling | PMI is heavy; break-even may be too long |
Run your own picture this way. Say your payoff balance is 85% of a realistic value. You are in the borderline row. Closing costs rolled into the loan push that number higher, and that can tip you over a threshold. Costs paid in cash do not.
Appraisal value is everything here. A value that comes in a few percent below your estimate can move you a full tier.
How Do You Check Where You Stand?
Start with two numbers: your payoff balance and a realistic home value. Your servicer gives you the payoff figure. For value, look at recent sales of similar homes nearby, and treat online estimates as a rough guide only. An appraiser works from comparable sales and the condition of your home, and the result can differ from the estimate.
Then work through this list:
1. Divide the payoff balance by your best value estimate. That is your starting LTV.
2. Add the closing costs you plan to finance, if any, then recalculate your LTV.
3. Decide whether you want cash back. Even a modest amount can change how the loan is classified.
4. Note your occupancy and unit count. A principal residence gets the best limits.
5. Check your credit and debts. Conventional PMI is priced off credit, while FHA premiums follow a set schedule.
Appraisals can land below an online estimate. If your portal figure puts you right at 80%, a slightly lower appraisal would mean the refinance carries PMI you did not plan for. Build your numbers with a cushion, and decide in advance what you will do if the value comes in low.
Rate-and-Term or Cash-Out: What Do the Limits Look Like?
A rate-and-term refinance, which conventional guidelines call a limited cash-out refinance, pays off the old loan and costs and gives you only a small amount back. A cash-out refinance lets you take more, but the maximum LTV drops sharply.
Fannie Mae's Eligibility Matrix sets these ceilings for a principal residence. Lenders may add stricter requirements of their own, so treat them as outer limits.
| Refinance path (principal residence) | Maximum LTV |
|---|---|
| Limited cash-out, 1-unit, fixed-rate | 97% |
| Limited cash-out, 1-unit, ARM | 95% |
| Limited cash-out, 2–4 units | 95% |
| Cash-out, 1-unit | 80% |
Read that table carefully. The 97% ceiling is why a 20% equity requirement is a myth. Twenty percent is the threshold for avoiding PMI, not for qualifying. A borrower with 5% equity may qualify for a rate-and-term refinance and still pay PMI.
Occupancy matters too. Limits fall for second homes, investment properties and manufactured housing. If the home is not your primary residence, the leverage is lower. Ask before you assume.
For comparison, FHA has its own refinance routes. The FHA rate-and-term with an appraisal reaches 97.75% on a principal residence you have occupied for the previous twelve months. The FHA cash-out reaches 80% LTV on a home you have owned and occupied for twelve months before the case number. Those keep you in the FHA system, with its premium. Terms depend on the lender's guidelines, the property type, the leverage, and a full review of the credit profile.
Cash back deserves its own warning. According to the Fannie Mae Selling Guide, the limited cash-out category has defined cash-back limits. Take more than a small amount and the loan can be reclassified as cash-out, with a lower LTV cap and different pricing.
What Does Underwriting Look At?
A conventional refinance is underwritten as a new loan. It is not an FHA streamline. The FHA Streamline refinances an existing FHA loan with no appraisal, a limited credit review and a net tangible benefit, and the premium continues. Conventional has none of those shortcuts.
Expect a full review of:
- Income and employment, documented the usual way
- Assets, including the funds for closing costs and any reserves
- Credit, which drives PMI pricing as well as approval
- Debts, measured against income
- The property, through the appraisal and title work
FHA is forgiving on ratios. The base pair is 31/43 (housing and total debt to income), and documented compensating factors reach 40/50 at the top tier. Conventional guidelines differ, and the automated findings on your file govern most outcomes. Do not assume the ratios you passed on carry over.
Everything here is subject to lender guidelines and full file review. Nothing is a commitment to lend. Lendmire's piece FHA to Conventional Refinance Requirements for Borrowers With Equity lists the documents lenders commonly ask for.
What If You Don't Have Enough Equity Yet?
You have four real options. None is a failure.
Wait. Equity grows through payments and, in many markets, appreciation. Setting a target LTV and checking back is a legitimate plan.
Pay down principal. A lump sum can move you across the 80% line. Do the math first. Cash tied up in the house is cash you cannot reach, so keep an emergency fund.
Refinance now with PMI. This can still pay off if your credit has improved or if the FHA premium is the larger cost. The federal Homeowners Protection Act gives you a way out of the new PMI later. Per the CFPB, you can request removal when you reach 80% of the original value, and the lender must terminate it automatically at 78% if you are current. A written request requires a good payment history and no junior liens, and the lender may ask for evidence the value has not fallen. Those protections measure against the new loan's own original value, not your old FHA loan.
Use an FHA streamline. If your goal is a lower payment and you cannot reach conventional, a streamline keeps you in FHA. It does not remove the premium.
If the appraisal comes in low, you have a short decision tree. Ask whether the lender will review the appraisal for errors. If the value stands, recalculate LTV. If you are now in a worse tier, either pay down to the threshold or pause and wait. A low appraisal is information, not a verdict.
Does the Math Actually Pay Off?
Break-even is closing costs divided by monthly savings. The answer is the number of months before the refinance starts paying you back. The Federal Reserve's refinancing guide recommends running this calculation before you commit.
Several things stretch it out:
- Financed closing costs. You can pay costs in cash or roll them into the loan. Rolling them in raises the balance and the LTV.
- A reset term. Starting a new thirty-year loan lowers the payment but extends how long you pay interest.
- A prepayment penalty on your current loan, if there is one. Check your note.
- Moving soon. If you sell within a few years, the savings may never catch up to the costs.
- The upfront premium you already paid. Treat a refund on a refinance to conventional as unlikely, and ask your servicer to confirm. It is a sunk cost either way.
What drives the monthly savings? Mostly the removal of FHA mortgage insurance, partly offset if the new loan has PMI. The interest cost of the new loan and the new balance move the number too. The Loan Estimate shows the new loan's features and costs, and it carries a five-year total of payments, including mortgage insurance. Compare Loan Estimates from more than one lender, since a refinance is disclosed the same way regardless of who holds your current loan.
A rule of thumb that holds up: if the break-even is shorter than the time you expect to stay, the refinance usually earns its place. If it is longer, wait or look at other options.
Where Does the General Rule Break?
Most of the mechanics above are standard. These cases are not.
Older FHA loans. The HUD handbook's MIP cancellation section covers only loans closed under HUD's earlier schedule. If your loan is that old, you may reach cancellation without refinancing at all. Ask your servicer which rule applies to your case number.
Two-to-four-unit homes. The ceiling is 95% for a principal residence, and the cash-out numbers are lower than for a single unit. If you live in one unit and rent the others, the occupancy still counts as principal residence, but the unit count tightens the limits.
Second liens. An existing second mortgage that stays in place, or new subordinate financing, changes the combined LTV. That combined figure can be what the lender watches.
Manufactured housing. The matrix has separate rules and lower cash-out limits.
Borrower not on title, and trusts. These get special handling. Raise them at the start.
Escrow. Your old servicer returns the escrow balance after payoff, and the new loan sets up its own. Expect that money to come back separately, not as a credit against your closing costs.
Credit events. HUD's waiting periods (two years from a chapter 7 discharge, three years from a foreclosure) are HUD rules, and conventional programs set their own. A recent event can change your options.
How Does the Refinance Run, Step by Step?
1. Get your payoff balance and an honest value estimate.
2. Choose rate-and-term or cash-out.
3. Apply and review the Loan Estimate.
4. Go through underwriting, with full documentation.
5. Complete the appraisal. It sets your LTV and your tier.
6. Close, at which point the new loan pays off the FHA loan, and the old FHA lender remits mortgage insurance through the month the loan is paid in full, per the same HUD handbook.
7. After closing, if the new loan has borrower-paid PMI, you hold the removal rights described above.
One caution sits on the Loan Estimate itself: you may not be able to refinance this loan in the future. Your finances, your property value and the market all have to cooperate. Plan accordingly.
Key Terms Defined
LTV (loan-to-value): Your loan balance divided by your home's appraised value, shown as a percentage.
Equity: The home's value minus what you owe on it.
MIP (mortgage insurance premium): The FHA's insurance charge, paid upfront and annually. It protects the lender, not you.
PMI (private mortgage insurance): The conventional version of mortgage insurance. It is required on many loans above 80% LTV and can be removed later.
Rate-and-term (limited cash-out) refinance: A refinance that pays off your old loan and costs, with only a small amount of cash back.
Break-even: The number of months of savings it takes to repay your closing costs.
CLTV (combined LTV): All loans secured by the home, added together and divided by the value.
What Does the Decision Look Like in Practice?
Picture a homeowner four years into a thirty-year FHA loan with a small original down payment. The balance sits at 82% of the appraised value. Conventional would allow the loan, with PMI. The question is whether the removal of the FHA premium, net of the new PMI, saves enough monthly to repay closing costs inside the time they plan to stay.
Now picture the same homeowner at 78%. Mortgage insurance is gone from the picture, and the break-even shortens. Different tier, different answer.
The takeaway is simple: do not ask "do I have enough equity?" Ask "which tier am I in, what does it cost me to get there, and how long will I keep the loan?" If you are weighing a refinance and want the break-even run on your own numbers, Lendmire can help you compare the programs on the same home.
Frequently Asked Questions
Can I drop FHA mortgage insurance without refinancing?
Sometimes, on older loans. Loans closed under HUD's earlier schedule have a cancellation section in the handbook. Newer loans follow a duration schedule based on original LTV and term, and equity growth alone does not change it. Your servicer can tell you which applies.
Do I get my upfront FHA premium back if I refinance to conventional?
Treat a refund as unlikely. A refund of the upfront premium is generally tied to refinancing into another FHA loan, not into a conventional one. Ask your servicer before you count on anything.
What happens if my appraisal comes in low?
Your LTV rises, which can push you into a tier with more PMI, or leave you without the PMI savings you were hoping for. You can ask the lender to review the appraisal for errors, pay down the balance to reach your target, or wait and try again once your equity improves.
Is 20% equity required to refinance?
No. Conventional rate-and-term refinances can go well above 80% LTV on a principal residence, per Fannie Mae's published limits. Twenty percent matters because it is the usual point where PMI stops. Qualifying and avoiding PMI are separate questions. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
Can I take cash out at the same time?
Yes, but the maximum LTV falls to 80% for a one-unit principal residence under Fannie Mae's limits. Taking more than a small amount of cash can reclassify a rate-and-term loan as cash-out. Decide which you want before you apply.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Eligibility Matrix
2. Fannie Mae Selling Guide: Limited Cash-Out Refinance Transactions
3. CFPB
4. Federal Reserve: A Consumer's Guide to Mortgage Refinancings
5. HUD Handbook 4000.1 excerpt (refinance MIP remittance; cancellation scope)
This article is part of Lendmire’s FHA loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How to Refinance an Existing FHA Loan Into Conventional · How Much Equity a House Hacker Needs to Refinance an FHA Loan · Conventional vs FHA Loan on a 2-4 Unit: The Self-Sufficiency Test
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.