On most FHA loans the mortgage insurance never comes off, and a refinance is the only exit. That makes the exit sound obviously worth taking. The arithmetic is closer than it looks.
Short version: escaping MIP on a typical FHA loan is worth about $28,500 over the remaining term. It still does not justify a refinance by itself — on the example below the break-even is a new rate of 6.08% against a current 6.2%. Reaching 20% equity first moves that threshold to 6.26%.
For FHA loans closed since June 2013 with less than 10% down, the annual mortgage insurance premium runs for the full life of the loan. Paying the balance down does not remove it, and neither does the house appreciating. The mechanics of that rule are in FHA MIP vs. conventional PMI.
Take a concrete loan. A $320,000 house bought three years ago with the minimum 3.5% down. The base loan was $308,800, the upfront premium of 1.75% added $5,404, and the starting balance was $314,204 at 6.2%.
| Today, three years in | |
|---|---|
| Remaining balance | $302,328 |
| Principal and interest | $1,924 |
| Monthly MIP at 0.55% | $139 |
| Total payment | $2,063 |
| MIP still to pay over 27 years | $28,492 |
Twenty-eight thousand dollars is a real number, and it is the reason this question gets asked. It is also the number that makes people skip the rest of the calculation.
Two things eat the prize before you get to keep it.
The clock resets. A new thirty-year loan on a balance you have already been paying down for three years puts you back at the beginning of an amortisation schedule, where almost every dollar is interest. You are not continuing the old loan without MIP; you are starting a new one.
The costs come with it. Around $6,000 in closing costs, which either come out of your pocket or get added to the balance and carry interest for thirty years.
Together these mean the new rate has to do real work. Here is the same loan refinanced at a range of rates, with $6,000 of costs rolled in, compared against staying put and paying MIP for the remaining term. Total cost is every payment made plus the balance still owed at the ten-year mark:
| New rate | Difference over 10 years | |
|---|---|---|
| 5.2% | −$27,549 | Refinance wins |
| 5.5% | −$18,144 | Refinance wins |
| 5.8% | −$8,788 | Refinance wins |
| 6.08% | $0 | Break-even |
| 6.2% | +$3,880 | Staying wins |
| 6.5% | +$13,331 | Staying wins |
The break-even sits at 6.08% against a current rate of 6.2%. In other words, all $28,492 of future MIP buys you is the ability to refinance at a rate about a tenth of a point below what you already have. Anything less than that and the refinance costs you money despite removing the premium.
This is the part that surprises people. The premium is permanent, the sum is large, and the instinct is that escaping it must be worth almost any rate. It is not. A rate applies to the whole balance; the premium applies at 0.55% a year. The rate is the bigger lever, and it decides the outcome.
There is a second variable, and it is the one most often missed: a conventional refinance below 20% equity does not remove mortgage insurance. It replaces MIP with PMI.
In the example above the house has risen about 12%, to $358,400. With $6,000 of costs added the new loan is 86% of that — above 80%, so conventional PMI applies. You have swapped a permanent premium for a cancellable one, which is a genuine improvement, but you have not removed the charge today.
Now run the same comparison with enough appreciation to clear 20%:
| Equity position | New loan LTV | Insurance after | Break-even rate |
|---|---|---|---|
| House up 12% | 86.0% | PMI, cancellable | 6.08% |
| House up 20% | 80.3% | None | 6.26% |
Clearing 20% moves the break-even by 0.18 of a point — from needing a rate below your current one, to being able to accept a rate slightly above it and still come out ahead. That is the difference between a refinance that works and one that does not, and it turns entirely on whether you have crossed the equity line.
Which makes the sequencing advice simple: if you are close to 20%, get there first. A few months of extra principal, or a few more months of a rising market, can be worth more than shopping for a better rate.
Run your own break-even
Enter your balance, rate, and costs and see the month the refinance pays for itself.
FHA to conventional is not the only refinance available to you. An FHA streamline refinance goes FHA to FHA, usually without a new appraisal and with reduced documentation, and it is generally faster and cheaper to close.
It does not remove the mortgage insurance — you stay in the FHA system and keep paying MIP. What it can do is lower the rate, which on the numbers above is the variable that actually drives the result. If rates have fallen but you are nowhere near 20% equity, the streamline captures most of the benefit without the appraisal risk.
One detail worth knowing before you choose: refinancing from one FHA loan to another within 36 months of the original closing earns a partial refund of the upfront premium you paid. Going to a conventional loan does not. If you are inside that window, the refund is a real number that belongs in the comparison.
Refinancing out of FHA is worth doing when the rate cooperates, and not worth doing on the strength of the premium alone. Escaping MIP is the reason to look; the rate and your equity decide whether to act.
If the numbers say stay for now, that is not a permanent verdict. Rates move, and equity builds every month. The related pieces are in FHA MIP vs. conventional PMI, when refinancing actually makes sense, and what refinance closing costs cover.