The answer depends on your situation. By the end of this article, you’ll know which option better meets your needs based on your equity, current loan type, and financial goals.
Key Takeaways
- With 20% or more equity, a conventional loan usually offers the best value since you can eliminate mortgage insurance.
- If you have an FHA loan with less than 20% equity, an FHA streamline refinance provides a quick, lower-cost option.
When You Have 20% Equity or More
Understanding equity: Equity is the difference between your home’s current value and your mortgage balance. For example, if your home is worth $300,000 and you owe $240,000, you have $60,000 in equity—that’s 20%.
Why 20% matters: Once you reach this threshold, refinancing to a conventional loan becomes particularly attractive. You can eliminate mortgage insurance entirely.
With an FHA loan, you’re stuck paying mortgage insurance premiums (MIP) for 11 years if you put down 10% or more initially. Put down less than 10%? You’ll pay MIP for the entire loan term.
Conventional loans work differently. Private mortgage insurance (PMI) automatically drops off when you hit 20% equity. Refinance into a conventional loan at 20% equity, and you’ll never pay mortgage insurance again.
The savings add up quickly. Even on modest homes, monthly mortgage insurance can cost several hundred dollars.
Nearly there? If you’re sitting at 17-19% equity and building quickly, switching to a conventional loan now might still make sense. You’ll pay PMI temporarily, but you’ll avoid paying for another refinance later plus the continued MIP on your FHA loan. Run the numbers to see which path costs less overall.
Important exceptions: VA loans don’t require ongoing mortgage insurance (just an upfront funding fee), so there’s no equity-based advantage to refinancing. USDA loans have reduced-rate mortgage insurance, so calculate carefully whether refinancing pays off.
When an FHA Streamline Refinance Makes Sense
If mortgage rates have dropped since you bought your home and you currently have an FHA loan, a streamline refinance could save you money with minimal hassle.
This option skips much of the typical paperwork—often no credit check, income verification, or appraisal required. However, you can’t take cash out (maximum $500 added to your balance).
Eligibility requirements:
- Your current FHA loan must be at least 210 days old
- You must be current on payments with a solid payment history
- You must gain a tangible benefit—typically at least a 0.5% rate reduction
If your equity is approaching 20%, compare the streamline option against refinancing to a conventional loan. The insurance savings on a conventional loan might outweigh the streamline’s convenience. But if you’re nowhere near 20% equity, a streamline refi can start saving you money immediately.
When You Already Have a Conventional Loan
Stick with it. The ability to drop PMI at 20% equity makes conventional loans hard to beat. Switching to an FHA loan would lock you into paying mortgage insurance much longer.
Rare exceptions exist, but they’re uncommon enough that you should run detailed calculations before making any switch.
When Your Home Value Has Dropped
Negative equity—owing more than your home is worth—severely limits refinancing options. According to CoreLogic, only 5.6% of Louisiana homes (the worst-performing state) had negative equity in Q2 2024, and nationwide, homeowners gained $1.3 trillion in equity that year.
If you’re in that small percentage with negative equity, an FHA streamline refinance may be your only option. The good news: it could still lower your rate and monthly payment if you’re eligible.
When Your Credit Score Has Dropped
A low credit score won’t necessarily disqualify you, but it will make refinancing harder. Most lenders avoid subprime borrowers, and those who don’t will charge significantly higher rates and closing costs.
Exception: Some lenders skip credit checks for FHA streamline refinances, making this your most accessible option with damaged credit.
The Bottom Line
Choose a conventional loan if:
- Your equity is at or approaching 20%
- You want to eliminate mortgage insurance costs
- Your finances are strong
Stick with an FHA loan if:
- Your equity is well below 20%
- You qualify for an FHA streamline refinance
- You need a cash-out refinance with more flexible credit requirements
The smartest approach: run the numbers using different scenarios, get quotes from multiple lenders, and consult with a mortgage professional who can show you real costs for your specific situation.
