Conventional Loan Refinance
What’s the main benefit of consumer access to a conventional refinance loan? To save money by lowering the monthly payments and leaving disposable income for other expenses such as credit cards.
Conventional refinance loans are the most common type of loan in the United States. Primary residence homeowners can cash out and refinance their mortgage to benefit from lower mortgage rates and more favorable terms. Many homeowners take advantage to cash out refinance on their home equity to repay other debts or for home remodeling projects.
Why Should I Choose a Conventional Refinance?
There are many reasons why a homeowner can request an application to refinance their conventional loan.
The higher the credit score, the better
An improved credit score, usually above or equal to 680, is a good sign that the borrower is a creditworthy person with good management of debt consolidation. The lender is more willing to offer a lower loan term and consequently interest rate because they perceive the borrower as low risk. If your credit score has improved since you took your conventional mortgage, you can apply for a refinance to benefit from better repayment terms for your new loan.
Lower interest rates
Interest rates fluctuate but homeowners can benefit from a conventional loan refinance if they switch to a lower interest rate or if they want to anchor their mortgage to a fixed interest rate. Lower interest rates mean lower monthly payments and lower interest charges throughout the mortgage loan’s lifespan.
Cash out from home equity
Homeowners who have built some equity from their home can tap into their increased wealth and cash out the difference. With cash in hand, they can remodel or improve their home, invest in better insulation, repay existing debt, or buy a home or investment property. If you currently have an adjustable-rate mortgage, you may also consider refinancing to a conventional loan with a fixed-rate one, thus potentially lowering your interest to better align with your financial goals.
Eliminate Private Mortgage Insurance (PMI)
Mortgage payment lenders require you to pay PMI if your down payment is less than 20% of the home value. If you have cash or if your home equity has increased, you can use that money as a down payment that crosses the 20% threshold and remove homeowners insurance from your loan. Most mortgages roll the cost of PMI into the current loan. By eliminating it, borrowers soon can lower their monthly payments.
More favorable terms on refinance options
Borrowers can opt to extend the repayment period to lower the monthly payments on their mortgage. A conventional refinance can help them achieve more favorable repayment terms and re-adjust their household finances.
Likewise, if a borrower wants to pay less in interest charges, they can refinance their conventional mortgage with a shorter one.
Switch from a different loan
Borrowers who need to refinance an FHA loan must seek professional guidance on what type of refinance works best for their streamline refinance loan. If you replace an FHA loan with a conventional refinancing, you can eliminate FHA mortgage insurance and explore more competitive cash-out refinance rates. In addition, a conventional loan meets loan standards that are set by Fannie Mae or Freddie Mac.
Of course, the pros and cons of refinancing should be carefully considered before making a decision.
Conventional Refinance Requirements
Credit score loan calculator
Conventional loan lenders require a credit score of 680. The higher the credit score, the better the loan terms. If you have managed to improve your credit score, you can benefit from better interest rates on your refinance.
Most lenders require borrowers to have a debt-to-income ratio of less than 43%. A low ratio means that the borrower has more financial room to repay their mortgage.
Loan-to-value (LTV) refers to the finance value of the property still owed. When a borrower gets a mortgage, they start paying monthly payments toward the mortgage and slowly pay off the value of the property. Most lenders ask for a loan-to-value of at least 95%, which means the borrower has paid off 5% of the home value through their monthly payments.
An LTV of 80% means you have paid off 20% of the home value. You can cash out this money and put it toward an increased down payment once you refinance. You then don’t have to pay for private mortgage insurance.
If a borrower chooses a conventional refinance, they must leave 20% equity untouched if they choose to cash out. The borrower can’t withdraw this equity.
A missed monthly mortgage payment or two through the lifetime of home loans may be acceptable by the housing lender as long as the borrower provides a detailed letter of explanation. This letter of explanation must include evidence that the late payments were out of the borrower’s control and that late monthly payments would not happen again.
Conventional Refinance Process
The conventional refinance option is very similar to the actual conventional loan process. Only the borrowers that will appear on the mortgage must submit asset and income documentation. The loan officer uses bank statements and pay stubs to verify the borrower’s assets and income.
Any large deposits within 1 percent of the purchase price need to be sourced with an accompanying letter of explanation, as this is required for anti-money laundering laws. This information is cross-referenced with a verification of employment that is filled out by the employer, the most recent 2 years of W-2 forms or 1099 Forms, and tax returns.
To qualify for a conventional refinance you will need a home appraisal report to show the value of the property and calculate LVT. If the home is appraised higher than the current remaining loan amount, this means that the home as real estate has gained equity and the borrower can tap into this equity.
Trust Society Mortgage for Your Conventional Refinance Loan
“Can I refinance?” That’s the question many homeowners ask when considering ways to improve their financial situation.
While the answer depends on your specific circumstances, refinancing your home through a conventional refinance can offer a range of benefits, including the potential to get a conventional loan with more favorable terms, equal housing opportunity for homeowners, and access to competitive conventional refinance rates.
Society Mortgage is here to guide you to the best mortgage choice in order to lower your monthly payment for you and your family. Contact us today and we’ll help you find the best conventional mortgage refinance program for your needs!
Frequently Asked Questions
Yes, just like with an original mortgage refinance, there are closing costs and disclosures associated with refinancing. These might include origination fees, appraisal fees, title fees, and more. Calculate these costs to determine if refinancing makes financial sense.
In most cases, closing costs can be rolled into the current mortgage loan so you don’t have to pay them in advance.
A conventional refinance does not have government insurance or guarantees like FHA (Federal Housing Administration) or VA (Veterans Affairs) loans. As a result, conventional refinances might have different qualification requirements, loan options, loan limits, and mortgage insurance stipulations.
Venice Luckx is the Sales Director (NMLS ID: 1810923) at Society Mortgage. Hailing from Belgium, she now calls sunny South Florida home. With a background in Business Engineering, Venice brings a passion for finance and entrepreneurship to her role. She’s dedicated to simplifying the home-buying process and is committed to helping you achieve your financial goals.