You refinanced out of FHA last year because you hit 20% equity and didn’t want to pay mortgage insurance anymore. Clean decision. The calculator said you’d save $180 a month. Your loan officer called it a “no-brainer.”
Six months later, you’re looking at the actual numbers. The savings exist, but they’re smaller than expected. Your payment dropped, but your escrow cushion reset. Your rate went up half a point because conventional loans don’t price the same as FHA. And you’re starting to realize you traded one set of costs for another set that nobody mentioned during the sales pitch.
The question isn’t whether FHA mortgage insurance is expensive. It is. The question is whether the specific moment you chose to refinance was actually optimal, or whether you jumped early and left money on the table.
The Thing About FHA Insurance Most People Get Wrong
FHA mortgage insurance has two parts: an upfront premium (1.75% of the loan, usually rolled into the balance) and an annual premium that varies by loan-to-value ratio and loan size. For loans taken out after 2013 with less than 10% down, that annual premium stays for the entire life of the loan—it never drops off. For loans with 10% or more down, the premium drops after 11 years.
That structure makes people desperate to escape. The moment they approach 80% LTV, they start shopping for a conventional refinance. Loan officers encourage this. Rate comparison sites are built around it. The entire industry positions FHA-to-conventional refinancing as an obvious wealth move.
But here’s what gets missed: the cost of refinancing isn’t just the closing costs. It’s the rate environment you’re refinancing into, the equity position you’re refinancing from, and the timeline you’re working within. And if any of those variables are slightly off, you can absolutely lose money by refinancing too early.
The Closing Cost Reset Nobody Prices In
A typical refinance costs 2-3% of the loan amount in closing costs. On a $300,000 loan, that’s $6,000 to $9,000. You can roll those into the new loan, but that just means you’re financing them over 30 years and paying interest on money that went to an appraiser and a title company.
Let’s say you’re paying $200/month in FHA mortgage insurance. You refinance, pay $7,000 in closing costs, and eliminate that $200. Your break-even point is 35 months—just under three years. If you’re planning to move in two years, you lose money. If rates go up between now and then and you can’t sell for what you hoped, you lose money. If your income changes and you need liquidity, that $7,000 is gone.
The math isn’t wrong, but it’s incomplete. It assumes you stay in the house, that nothing else changes, and that the $200/month you’re saving isn’t offset by a higher rate, a higher principal balance, or a worse loan structure.
The Rate Trade-Off That Breaks the Model
FHA loans are government-backed, which means lenders price them more aggressively than conventional loans. If you took out an FHA loan at 3.5% two years ago, your conventional refinance rate today might be 4.2%. Even if you’re dropping $200/month in mortgage insurance, you’re picking up $150/month in additional interest. Your net savings just shrank to $50/month, and your break-even point doubled.
People don’t always account for this because they’re comparing their current total payment to their new total payment, and as long as the number is lower, it feels like progress. But if you’re paying more in interest to save on insurance, you’re not eliminating a cost—you’re shifting it. And interest accrues on a larger balance over a longer period than insurance premiums do.
This matters most when rates have moved since you took out the FHA loan. If you locked in at a historic low, refinancing into a higher rate—even without insurance—can cost you tens of thousands over the life of the loan. The monthly savings look clean. The lifetime cost does not.
The Equity Timing Trap
Most borrowers refinance as soon as they hit 20% equity because that’s the threshold where conventional loans drop PMI. But hitting 20% equity on an FHA loan doesn’t mean you’re in the optimal position to refinance. It just means you’re in the minimum position.
If you refinance at exactly 20% equity, you’re refinancing 80% of your home’s value. If your home is worth $400,000, that’s a $320,000 loan. Conventional loans price better at lower LTVs. At 75% LTV, you might get a rate that’s 0.25% lower. At 70%, even better. If you refinance at 20% equity instead of waiting until you hit 25% or 30%, you’re locking in a worse rate than you’d get six months or a year later.
The trade-off is time. Waiting means paying FHA insurance for longer. But if that insurance costs $200/month and waiting six months saves you 0.25% on a $320,000 loan, you’re paying $1,200 in insurance to save $40,000 in interest. That’s not a close call.
The issue is that nobody frames it this way. The pitch is always “refinance as soon as you can,” not “refinance when the rate improvement justifies the insurance cost you’ll pay while waiting.” And because people are emotionally primed to hate mortgage insurance, they jump early and lose the pricing advantage they could have had.
The Appraisal Risk That Kills Deals
When you refinance, your lender orders a new appraisal. If your home appraises for less than you expected, your LTV goes up and your rate gets worse. If it appraises low enough, you don’t qualify for the refinance at all.
This happens more often than people expect, especially in markets where home prices have flattened or dipped slightly. You think you’re at 20% equity based on Zillow or your county’s assessed value, but the appraiser comes in 5% lower and suddenly you’re at 25% LTV instead of 20%. Your rate climbs. Your closing costs go up. Or the deal dies entirely and you’re out the appraisal fee.
FHA loans let you use the original purchase price or the current appraised value, whichever is lower. Conventional refinances only use the current appraised value. If you bought at the peak and values have softened, you’re stuck. And if you’ve been counting on that refinance to drop your payment, you’re now locked into FHA insurance longer than you planned, with no good exit.
This is why refinancing right at the 20% equity line is risky. If you wait until you’re at 25% or 30%, an appraisal coming in low doesn’t kill the deal. It just adjusts the numbers slightly. You still qualify. You still get the refinance. You’re not dependent on the appraiser seeing your home the same way you do.
When Refinancing Early Actually Wins
There are scenarios where refinancing out of FHA as soon as possible makes sense, even if you’re cutting it close on equity or rates.
If you took out an FHA loan with less than 10% down after 2013, your mortgage insurance never drops off. You’re paying it for 30 years unless you refinance. In that case, refinancing at 20% equity is almost always worth it, even if the rate is slightly higher. You’re not trading a temporary cost for a permanent one—you’re eliminating a permanent cost.
If your FHA loan is a high-balance loan in an expensive market, your annual mortgage insurance premium is higher—often 1.05% instead of 0.85%. That’s an extra $60/month on a $300,000 loan. The cost of staying in FHA is higher, so the break-even math tilts toward refinancing sooner.
If you’re planning to stay in the house for 10+ years and you’re confident in your equity position, refinancing at 20% works. The closing costs amortize over a long enough period that the rate and payment differences matter more than the upfront expense.
But if you’re anywhere near the margin—if you might move, if rates have risen, if your equity is based on a Zillow estimate rather than a formal appraisal—refinancing early is a gamble. And the cost of losing that gamble is higher than the cost of waiting six months.
What Nobody Tells You About Recasting Instead
If you have cash and you’re trying to lower your payment without refinancing, some lenders let you recast your FHA loan. You make a lump-sum principal payment, and the lender recalculates your payment based on the new lower balance. Your rate stays the same. Your term stays the same. You’re not taking out a new loan, so there are no closing costs—just a small recast fee, usually a few hundred dollars.
The downside is that FHA mortgage insurance doesn’t drop off. You’re still paying it. But if your goal is to lower your monthly payment without refinancing into a worse rate, recasting can be a cheaper path than refinancing. You pay down the balance, your payment drops, and you’re not resetting the clock on a 30-year loan or paying thousands in closing costs.
Most people don’t know this option exists because loan officers don’t bring it up. It doesn’t generate a commission. It doesn’t involve a rate-shopping process. It’s not exciting. But if you’re sitting on cash and trying to decide whether to refinance or wait, recasting is worth pricing out.
The Missed Opportunity Cost of Locking Capital Into the Refinance
When you refinance, you’re spending $7,000 to $10,000 to eliminate a monthly cost. That’s capital you’re taking out of savings, or out of potential investment returns, to buy a lower payment. If you’re in a financial position where liquidity matters—if you’re self-employed, if you’re saving for another purchase, if your income is variable—spending that cash to refinance might leave you exposed.
The math assumes the $200/month you’re saving gets reinvested or used to pay down other debt. But if it just gets absorbed into lifestyle spending, you’ve traded a lump sum for a smaller recurring benefit that doesn’t compound. That’s not irrational, but it’s not the optimal use of capital either.
If you wait until you have 25% or 30% equity, you’re refinancing into a better rate, which means the savings are larger and the break-even period is shorter. You’re also more likely to have built up enough cash reserves that the closing costs don’t strain your liquidity. The refinance becomes a wealth-building move instead of a payment-reduction move.
The Decision Framework: When the Numbers Actually Work
Here’s how to know if refinancing out of FHA now makes sense for your situation:
Refinance immediately if:
- You have less than 10% down and your FHA mortgage insurance is permanent (post-2013 loans)
- You have 25%+ equity and can lock a rate within 0.25% of your current FHA rate
- You’re certain you’ll stay in the house for at least 5 years
- You have 6+ months of reserves after paying closing costs
Wait 6-12 months if:
- You’re at exactly 20% equity and rates have risen since your FHA loan
- Your equity estimate is based on Zillow, not a formal appraisal
- You’re within 2-3 years of the 11-year MIP drop-off point (10%+ down loans)
- Paying down principal for another year would move you from 80% LTV to 75% LTV
Don’t refinance at all if:
- You’re planning to move within 3 years
- Your FHA rate is more than 0.5% lower than current conventional rates
- Closing costs exceed 24 months of insurance savings
- You’d need to drain your emergency fund to cover closing costs
The question isn’t whether FHA insurance is worth escaping—it usually is. The question is whether right now, at your specific equity level, in this specific rate environment, refinancing saves you money or just moves it around. Most borrowers who refinance at exactly 20% equity in a rising rate environment end up wishing they’d waited. The ones who wait until 25-30% equity, or who refinance when rates have dropped, look back and realize they timed it right.
The Real Question Isn’t Whether to Refinance—It’s When
Refinancing out of FHA is almost always the right move eventually. The insurance is expensive and it doesn’t build equity. But the timing matters more than people realize. Refinancing at 20% equity when rates have risen costs you money. Refinancing when your appraisal might come in low costs you money. Refinancing when you’re planning to move in two years costs you money.
The optimal moment to refinance is when you have 25-30% equity, when rates are stable or falling, and when you’re confident you’ll stay in the house long enough for the closing costs to pay off. That might be six months after you hit 20% equity. It might be a year. But jumping the moment you’re eligible because you hate seeing that insurance line on your mortgage statement is how people lose money on decisions that should have been obvious wins.
If you’re close to 20% equity and thinking about refinancing, run the numbers with a longer timeline. Price out what waiting six months would cost in continued FHA premiums versus what it would save in rate improvement. Compare the refinance break-even point to how long you’re planning to stay. And if the answer isn’t clear, waiting is almost always cheaper than guessing wrong.
Should you also be thinking about whether refinancing into a shorter term makes sense once you’re out of FHA, or whether the rate environment makes keeping your FHA loan longer than planned the better move?