FHA vs Conventional Refinance: Which Costs Less Now?

With 25% equity, a conventional refinance usually costs less than an FHA refinance, because the Federal Housing Administration (FHA) charges mortgage insurance that a conventional loan at that equity level does not. In the worked example below, the conventional rate can sit up to about 0.69 to 0.85 percentage points above the FHA rate before FHA becomes the cheaper loan. That gap is the one number to test against your own quotes.

An FHA vs conventional refinance comes down to mortgage insurance. FHA charges a 1.75% upfront premium plus an annual premium, while a conventional loan with at least 20% equity typically carries no private mortgage insurance. At that equity level, conventional usually costs less unless its rate runs materially higher.

Which refinance costs less at a glance?

Feature	FHA refinance	Conventional refinance
Upfront insurance	1.75% of the base loan, usually financed	No FHA-style upfront premium
Annual insurance	0.50% or 0.55% a year for a 30-year loan with a base amount up to $726,200	Private mortgage insurance (PMI), usually only above 80% loan-to-value (LTV)
How long insurance lasts	11 years if LTV is 90% or less; otherwise the loan term	PMI can be cancelled on request at 80% and ends automatically at 78%
Maximum LTV, rate-and-term	97.75%	Set by lender and program
Maximum LTV, cash-out	80%	Commonly 80%, lender dependent
Credit floor	HUD decision score of 500 (capped at 90% LTV) or 580 for full financing	Lender-set; Fannie Mae dropped its blanket minimum for Desktop Underwriter loans in November 2025, but manual underwriting keeps 620
Loan size	County limits; floor is 65% of the conforming baseline	2026 conforming baseline: $832,750

The insurance schedule comes from the Department of Housing and Urban Development (HUD), which cut the annual premium by 0.30 points in 2023 and left the upfront premium unchanged. The conforming limit comes from the Federal Housing Finance Agency (FHFA). Lenders often add their own credit-score rules on top of both.

How much does the difference add up to? A US worked example

Hypothetical. Priya owns a home worth $400,000 with a $300,000 FHA balance, so her LTV is 75%. She compares two 30-year refinances of a $300,000 base loan. The rates and closing costs are assumed, chosen near current market levels, and are not quotes.

FHA path (assumed 7.00%):

• Upfront premium: $300,000 × 1.75% = $5,250, financed, so the loan becomes $305,250.
• Payment formula: L × r ÷ (1 − (1 + r)^−360), with r = 0.07 ÷ 12. Principal and interest: $2,030.84.
• Annual premium at 0.50% (LTV under 90%): about $300,000 × 0.50% ÷ 12 = $125.00 a month in year one, falling as the balance falls.
• Monthly total: about $2,155.84. Assumed closing costs: $4,500.

Conventional path (assumed 7.25%):

• No PMI at 75% LTV. Principal and interest: $2,046.53. Assumed closing costs: $6,000.

Priya pays about $109.31 less per month on the conventional loan. The fair comparison adds payments, closing costs and the balance still owed at the end of a holding period:

Holding period	FHA all-in cost	Conventional all-in cost	Conventional saves
5 years (60 months)	$420,983	$411,928	$9,055
11 years (132 months)	$543,622	$529,091	$14,531

Solving for the break-even, the conventional rate could rise to 7.85% (five years) or 7.69% (11 years) before the two loans cost the same. That is the 0.69 to 0.85 point tolerance. The premium calculation is an approximation, because HUD applies it to the average outstanding balance. Re-run it with real Loan Estimates, or use the Lending Logic Lab Refinance Break-Even Calculator.

Does the current rate environment change the answer?

It changes whether to refinance at all. The Federal Reserve raised its target range to 3.75% to 4.00% on September 16, 2026, and Freddie Mac's survey put the 30-year fixed average at 7.32% on October 22, 2026, down from 7.40% a week earlier but well above 6.19% a year before. A borrower whose existing rate sits below those levels has little to gain from a rate-and-term refinance, whichever loan type they pick.

The case that still works is an existing FHA loan carrying premiums for life. Because PMI can be cancelled and FHA premiums often cannot, swapping out an FHA loan can pay even without a lower rate. The Consumer Financial Protection Bureau (CFPB) says a servicer must end PMI automatically at 78% of the original value, and after a refinance the original value is the appraised value at that refinance.

Check your equity before any quote. The Lending Logic Lab Loan-to-Value Ratio Calculator shows which side of 80% you sit on.

When does FHA still win?

FHA tends to win in three situations, based on how the loans are built:

1. Equity under 20% after the refinance. Conventional then needs PMI, so the gap narrows or reverses. Request both quotes, because PMI pricing depends on your credit score.
2. A credit score or debt-to-income (DTI) ratio a conventional lender will not accept. HUD publishes a floor of 500 to 580, while conventional lenders set their own, and Fannie Mae's guide keeps a 620 floor for manually underwritten fixed-rate loans.
3. A short holding period with a lower FHA rate. If you will sell within a few years, the upfront premium matters less than the rate.

Conventional tends to win when equity is above 20%, your score is strong, and you plan to stay beyond five years. Borrowers with high DTI can compare options in How to Get VA Refinance Approval With High DTI Now Fast, which applies if you served in the military.

UK reader: is a remortgage or a product transfer cheaper?

This section uses British spelling and UK terms. The UK has no FHA, so the matching decision is between a remortgage, which moves the loan to a new lender, and a product transfer, which switches deal with your current lender.

The Bank of England held Bank Rate at 3.75% on 17 September 2026 by six votes to three, with three members preferring 4%. The next decision is on 5 November 2026. Its Money and Credit data show the effective rate on newly drawn mortgages rose to 4.60% in August 2026 from 4.45% in July, against 4.00% on the existing stock. Remortgage approvals with a different lender were 34,000, down from 34,600.

Hypothetical. Callum has a £200,000 balance with 20 years left and his fixed deal is ending. Both deals below are assumed rates and fees.

• Product transfer: 5.20%, no fee. Monthly payment: £1,342.11.
• Remortgage: 4.95%, with a £999 product fee and £450 legal and valuation costs, £1,449 in all. Monthly payment: £1,314.39.
• Monthly saving: 1,342.11 − 1,314.39 = £27.71. Break-even: £1,449 ÷ £27.71 = 52.3 months.

Over a two-year fix, payments, fees and remaining balance total £220,212.88 for the transfer and £220,674.60 for the remortgage, so the transfer is £461.72 cheaper. Only a deal running longer than about 52 months favours the remortgage. Ask both lenders about any early repayment charge on the old deal.

The relevant bodies are the Financial Conduct Authority (FCA), which regulates mortgage lenders, and the Financial Ombudsman Service (FOS), which handles unresolved complaints. In the US, the equivalents are the CFPB and your state regulator.

What should you gather before applying?

Collect these before requesting quotes, so every lender prices the same file:

1. Your current mortgage statement and payoff figure
2. Two recent pay stubs or, if self-employed, profit and loss figures
3. Recent bank statements
4. Homeowners insurance declaration page and the latest property tax bill
5. Photo ID
6. A written home value estimate for the LTV check
7. Two Loan Estimates (or two UK illustrations) side by side

The Lending Logic Lab Loan Application Documents Checklist lists the full set. The sibling guide on home equity pricing, The Smartest Ways to Lower Your Home Equity Loan Costs in 2026, covers what the 2026 Federal Reserve move did to variable-rate borrowing.

Three points to remember

1. Equity decides this comparison more than the loan label does.
2. A lower FHA rate must be large enough to cover about $5,250 of upfront premium on a $300,000 loan.
3. A UK remortgage fee is a hurdle: divide it by the monthly saving to get months to break even.

Frequently Asked Questions

Can I drop FHA mortgage insurance by refinancing? Often yes, if you move to a conventional loan with at least 20% equity, because a conventional loan at that level typically needs no PMI. FHA premiums last 11 years when LTV is 90% or less and the loan term otherwise. Compare the saved premium against your new rate and closing costs.

What credit score do I need for a refinance? HUD publishes a decision-score floor of 500 for FHA, limited to 90% LTV, and 580 for full financing. Fannie Mae removed its blanket minimum for Desktop Underwriter loans in November 2025, but individual lenders still set their own. Ask each lender for its written minimum before paying for an appraisal.

What is the 2026 conforming loan limit? The FHFA set the baseline limit for one-unit properties at $832,750 for 2026, with a higher ceiling of $1,249,125 in high-cost areas. Loans above the local limit are jumbo loans and price differently. FHA limits follow separate county figures set at no less than 65% of the conforming baseline, so check the limit for your own county before you compare programs.

Is a remortgage or a product transfer better in the UK? Divide the remortgage fees by the monthly saving. On a £200,000 balance, £1,449 in fees against a £27.71 monthly saving takes about 52 months to recover, so a two-year fix may not repay it. The Bank of England reported new mortgages at an effective 4.60% in August 2026, so compare quotes, not headline rates.

Where do I complain about a mortgage lender? In the US, submit a complaint to the CFPB, or contact your state regulator or attorney general. In the UK, complain to the lender first, then take an unresolved case to the Financial Ombudsman Service. Keep every quote, email and Loan Estimate, because dated documents make a complaint far easier to prove and resolve.

When this comparison stops applying

Everything above assumes about 25% equity and a credit profile that qualifies either way. If your equity is under 20%, or a lender will approve only one of the two programs, the cheaper loan is simply the one you can get, and the gap in this example no longer applies.

About the author: Lending Logic Lab

Sources & References

1. Federal Reserve Board, FOMC statement, September 16, 2026: federal funds target range 3.75% to 4.00%. Link: https://www.federalreserve.gov/monetarypolicy/files/monetary20260916a1.pdf
2. HUD, Mortgagee Letter 2023-05, February 22, 2023: annual mortgage insurance premium reduced to 0.55% for most borrowers; upfront premium unchanged. Link: https://archives.hud.gov/news/2024/2023-05hsgml.pdf
3. HUD, FHA INFO 2023-11, February 22, 2023: 30 basis point reduction in annual premium. Link: https://www.hud.gov/sites/dfiles/SFH/documents/SFH_FHA_INFO_2023-11.pdf
4. FHFA, Conforming Loan Limit Values for 2026: $832,750 baseline, $1,249,125 high-cost ceiling. Link: https://www.fhfa.gov/news/news-release/fhfa-announces-conforming-loan-limit-values-for-2026
5. CFPB, "When can I remove private mortgage insurance (PMI) from my loan?": 80% cancellation on request, 78% automatic termination. Link: https://www.consumerfinance.gov/ask-cfpb/when-can-i-remove-private-mortgage-insurance-pmi-from-my-loan-en-202/
6. Freddie Mac, Primary Mortgage Market Survey, October 22, 2026: 30-year fixed 7.32%, 7.40% prior week, 6.19% a year earlier.
7. Orrick, Herrington & Sutcliffe, Fannie Mae removes minimum credit score for DU loans, November 14, 2025. Link: https://infobytes.orrick.com/2025-11-14/fannie-mae-updates-selling-guide-removes-minimum-credit-score-for-loans-using-desktop-underwriter/
8. Bank of England, Money and Credit, August 2026 (published September 29, 2026): effective rate on new mortgages 4.60%, existing stock 4.00%; remortgage approvals with a different lender 34,000, as reported by PA Media via LBC. Link: https://www.lbc.co.uk/article/fe6a9a88f1464217a2045ad06d988be6-5HjdjCT_2/
9. Bank of England, Monetary Policy Committee dates and September 2026 decision: Bank Rate 3.75%, vote 6 to 3, next decision 5 November 2026.

This article is general educational information, not personalized mortgage, tax or legal advice. Rates, fees and rules change, and the worked examples use assumed figures. Please consult a licensed mortgage broker, adviser or regulated comparison service before you borrow, and never assume a rate, approval or saving is guaranteed.