Refinancing can be a great way to make your home more affordable and help you accomplish other financial goals. A conventional refinance allows you to lower your monthly mortgage payment, pay off your mortgage faster, or pay down other high-interest debt.
Benefits of a Conventional Refinance
River City Mortgage can help you decide if refinancing is right for you. The flexibility of a conventional refinance loan allows you to choose from a number of financial goals to make your home more affordable. Depending on various factors, including current interest rates and your credit score, now might be the right time for you to refinance your mortgage.
Choose Your Renfiance Goal
Use your home equity to get cash to pay for other expenses
Lower your monthly mortgage payment
Pay off your mortgage faster
How It Works
There are two types of conventional refinance loans — a rate and term refinance and a cash-out refinance. They differ by each helping you reach a specific financial goal, while their qualification requirements and options are fairly similar.
Conventional Rate and Term Refinance
Just as a conventional purchase loan is the most popular among homebuyers, a conventional rate and term refinance loan is most common among homeowners.
That said, you can refinance to this loan from another loan type as well, such as an FHA or VA loan. In any case, a rate and term refinance loan can lower your monthly mortgage payment by lowering your interest rate. If you have 20% or more home equity you can also eliminate mortgage insurance costs.
If you want to pay down your mortgage faster, you can shorten your term length, which may also lower your interest rate.
Conventional Cash-Out Refinance
A cash-out refinance loan replaces your existing home loan with a new larger mortgage, totaling more than you owe on your house, up to 80% of its value. At closing, you receive the difference in cash that you can use for other expenses, such as paying down high-interest debt.
A cash-out refinance decreases your equity but may be the best option to help you pay for other more immediate expenses, while also maintaining your monthly mortgage payments.
Get Approved for a Conventional Refinance Loan
With either of these conventional refinance options, you can get a new mortgage where you can choose from the following:
- Fixed interest rate that will remain constant through the life of your loan
- The length, or term, that makes your monthly payments and overall loan amount most affordable for you, such as a 15-, 25-, or 30-year mortgage
To qualify for a refinance, you’ll need the following:
- Documentation of consistent income
- Employment verification and history
- Debt-to-income ratio at or below 50% as qualified through automated underwriting
- Loan-to-value ratio of 80%, meaning you have at least 20% equity in your home
- Loans with less than 20% equity require monthly private mortgage insurance payments
Keep in mind that with a conventional refinance also comes closing costs, as well as new loan terms that you’ll want to fully understand, such as changes to mortgage insurance or any prepayment penalties.
Is a Conventional Refinance Right for You?
These answers to homeowner’s commonly asked questions may help guide you. To take the next step, our loan officers can help you make your loan more affordable.
What are the closing costs for a conventional refinance loan?
When you refinance your mortgage there are additional fees and costs to close your new loan. The closing costs cover expenses such as loan origination fees. They typically range between 2% to 4% of your loan amount.
For a rate and term refinance, consider whether the savings of your new loan will outweigh the costs of closing it. Calculate this by determining how long it will take you to make back the money you paid at closing, with the money you’re saving each month because of your new mortgage payment amount.
How does my home equity work?
As you’ve paid down your current mortgage, you’ve gained equity in your home, meaning you truly own a larger value of the home. How much equity you have impacts your ability to refinance.
Calculating your loan-to-value (LTV) ratio can help you understand your equity. It’s the percentage you owe on your mortgage, compared to your home’s available value. The LTV ratio should ideally be 80% or higher, meaning you have 20% home equity. This will help you get the most out of a conventional refinance.
You can likely refinance with lower equity, but may be approved at a higher interest rate and will need to continue to pay mortgage insurance.
Other refinance options, such as FHA or VA programs may have lower or no home equity requirements. An FHA refinance, for example, will however require that you pay mortgage insurance premiums.
How does a conventional refinance differ from an FHA Streamline Refinance or VA IRRRL?
A conventional refinance loan is available to homeowners with any loan type. Someone with an FHA loan, and the right financial circumstances, could switch to a conventional loan to eliminate mortgage insurance costs.
An FHA streamline refinance and VA Interest Rate Reduction Refinance Loan (IRRRL) are simplified refinance programs only available to those with existing FHA or VA loans, respectively. They have less strict qualification standards than conventional loans, so it’s easier to qualify for these loans upfront. However, they may provide borrowers with less flexibility than a conventional loan.
What can I use a cash-out refinance for?
With a conventional cash-out refinance you can borrow cash from your home equity to use in whatever way you choose.
Homeowners commonly use a cash-out refinance to pay down high-interest debt such as credit cards or other loans. Others may use the cash to reinvest in the home and pay for home improvements. Other examples include paying college tuition, investing the money, or using it as a down payment on another home.