Conventional Refinance: Optimize Your Mortgage for Better Savings
If you own a home, you also know the value of making your home as affordable as possible. Refinancing with a conventional loan can lower your mortgage payments, pay off your mortgage faster, pay down high interest debt, or help you borrow cash for other expenses.
Those who meet the qualification requirements for conventional refinance loans often get the most flexible loan options available.
Explore your refinance options
What is a Conventional Refinance Loan?
A conventional refinance involves replacing your existing mortgage with a new conventional loan, typically to secure a lower interest rate, adjust the loan term, or eliminate mortgage insurance. Unlike government-backed loans, conventional refinances are not insured by federal agencies, offering flexibility for borrowers with strong credit profiles and sufficient home equity.
This refinancing option is ideal for homeowners seeking to:
- Lower monthly mortgage payments
- Switch from an adjustable-rate to a fixed-rate mortgage
- Shorten or extend the loan term
- Remove private mortgage insurance (PMI)
- Access home equity through a cash-out refinance
How to Obtain a Conventional Refinance
Securing a conventional refinance involves several key steps:
- Evaluate Your Financial Goals: Determine the primary reason for refinancing, such as reducing monthly payments, changing loan terms, or accessing equity.
- Check Your Credit Score: Lenders typically require a minimum credit score of 620 for conventional refinances. A higher score can lead to better interest rates.
- Assess Home Equity: Calculate your home’s current value and outstanding mortgage balance to determine your equity percentage.
- Gather Documentation: Prepare necessary documents, including income verification, tax returns, and asset statements.
- Shop for Lenders: Compare offers from multiple lenders to find the best rates and terms that suit your financial situation.
- Apply and Lock in Rates: Submit your application and consider locking in your interest rate to protect against market fluctuations.
- Undergo Appraisal and Underwriting: The lender will appraise your home and review your financials to finalize the loan approval.
- Close the Loan: Sign the final documents and begin enjoying the benefits of your new mortgage terms.
Conventional Refinance Requirements to Meet
To qualify for a conventional refinance, borrowers typically need to meet the following criteria:
- Credit Score: A minimum score of 620 is generally required; higher scores may secure better interest rates.
- Debt-to-Income Ratio (DTI): Lenders prefer a DTI of 43% or lower, indicating a manageable level of debt relative to income.
- Loan-to-Value Ratio (LTV): An LTV of 80% or lower is ideal, as it may eliminate the need for PMI.
- Stable Income and Employment: Proof of consistent income and employment history is essential to demonstrate your ability to repay the loan.
- Property Appraisal: An appraisal is required to determine the current market value of your home.
Benefits of Conventional Refinancing
- Lower Interest Rates: Refinancing can secure a lower interest rate, reducing monthly payments and overall interest paid.
- Eliminate PMI: With sufficient equity (typically 20% or more), you can remove private mortgage insurance, decreasing monthly expenses.
- Flexible Loan Terms: Adjust your loan term to better align with your financial goals, whether shortening to pay off the loan faster or extending for lower payments.
- Access Home Equity: A cash-out refinance allows you to tap into your home’s equity for major expenses like home improvements or debt consolidation.
- Convert Loan Types: Switch from an FHA or VA loan to a conventional loan to eliminate associated mortgage insurance premiums.
Why Choose Redmond Mortgage?
At Redmond Mortgage Company, we specialize in helping homeowners navigate the refinancing process with confidence. Our experienced team offers personalized guidance, competitive rates, and a commitment to finding the right mortgage solution for your unique needs.
Conventional Refinance FAQs
Your home is a major investment. It’s ok to have questions about refinancing it. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.
In most cases, if your name is on the title and you’ve paid on your current mortgage for at least six months, you’ll be able to refinance with a conventional loan.
This is commonly required for those with current conventional or VA loans. Those who purchased their house with an FHA loan may need to wait up to a year to do a conventional cash-out refinance.
This depends on the type of refinance you want and the benefits you’re looking for. It’s best if you have at least 20% equity in your home for a rate and term refinance because it allows you to eliminate paying Private Mortgage Insurance (PMI). This amount of equity is often required for a cash-out refinance.
If you have less than 20% equity but have good credit, you may still benefit from refinancing, although you may need to continue paying PMI and your interest rate may not be as low as possible.
A conventional refinance goes through many of the same steps required to close a conventional purchase loan. Similar to when you purchased your house, you will need another home appraisal for a conventional refinance so that we can understand the value of the house.
Once the value is determined, we can finalize the details of your loan to determine how much your monthly payments will be reduced with a rate and term refinance or how much cash you can borrow with a cash-out refinance.
A conventional refinance can be done from various types of purchase loans, including an FHA or VA loan. It provides broader options for rate and term refinances or cash-out refinances. However it also requires more documentation, more time, and a higher credit score for approval.
The FHA Streamline refinance is only available to those who currently have an FHA loan. The same is true for the VA IRRRL only being available to those with a VA loan. Because these both use a streamlined process, they make lowering your interest rate and monthly payments fast and simple. Simplicity comes with fewer qualification requirements but also fewer refinance options.
When you close your conventional loan to refinance a house, you’ll need to account for several costs, both upfront and those included in your ongoing monthly payment. These will be clearly outlined as your loan is processed and before you close.
Closing costs cover expenses such as loan origination fees and an appraisal. These typically range from 2-4% of your total loan amount.