Stick with FHA. There is really no benefit on a conventional loan unless you have more than 10% equity. You cannot use the same appraisal as you did for FHA because new laws (HVCC) from May 2009, states that the lender must order an appraisal from a 3rd party company. Your Loan Officer will have no control over the value of the house (it may come in lower and you just spent another $300). On an FHA loan, the loan officer can suggest to the appraiser the value needed to make the loan work and the appraiser will work more to find the value. On an HVCC appraisal, the appraiser is paid half the money (the 3rd party company gets the other half) and he/she has to do twice as much work, so the appraiser is more apt to get done with yours and move on to the next one. Remember that you have to roll closing costs into the loan which will eat into the equity, so even if you have 10% equity on the appraisal, 4% will be eaten by closing costs. The MI rate on conventional loans is about .82% vs .50% for FHA. FHA requires 5 years min of MI, whereas conventional requires 2 years of MI. To drop MI from conventional, your house has to have 22% equity and be in a market that is in an upswing. Stay with the FHA loan.

I have a credit score of 788. The problem is the equity given that I just moved in the house 1 year ago. I was thinking that if I get 143000 or more, the PMI would decrease and not have to pay the upfront financing. Everyone keeps saying do FHA they help you a lot more if you one day get in a financial rut. I'm not sure if that is true. Would it be difficult to switch to a conventional loan now that I started this loan process?

Hello Vorrez,

I'm a mortgage consultant with Pulaski Bank. Ultimately, you'll need to do an 'apples to apples' comparison between your current loan payment and the payment with the FHA program offered by B of A. It really can be boiled down to dollars and cents. Keep in mind that while rates get all of the attention, it's your monthly payment and the total cost to refinance that should be your focus.

Depending on how much equity you have and what your credit score is, FHA may be the cheapest available option. However, you do have to keep in mind that with FHA you will have 'upfront mortgage insurance'. This amount will be 1.75% of your 'base loan amount'. While it is financed into the loan, it is certainly worth considering when determining your total cost to refinance.

If the appraisal comes back at $141,500 or more, you could technically opt for a conventional loan as your total loan amount would be 95% of the value. FHA lets you go up a little bit higher, but not by much.

The appraisal would have to be adjusted to fit conventional appraisal guidelines, but the change should be easy enough. It is likely in this case that you would incur an extra charge, but it shouldn't be much. At a loan-to-value of 95%, your monthly PMI will be expensive, but you would avoid the upfront mortgage insurance premium that FHA requires. It may make more sense.

If the appraisal comes in at your original purchase price of $149,000 I would guess the conventional loan would definitely make more sense as long as your credit is above a 680 or so. The monthly PMI is relatively inexpensive and the only way FHA would make sense is if your credit score were below 680 - in this case you would be heavily penalized on your interest rate on the conventional loan, but not through FHA.

Don't be shy about asking your loan officer for Good Faith Estimates to cover these scenarios.

Hope that helps!

Mark