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Conventional loan refinance: Limits and guidelines

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A conventional loan refinance could be a game-changer for your finances. Refinancing might help you secure a lower interest rate, reduce monthly payments, or even shorten your loan term. If you're looking to refinance your home, it may be time to explore a conventional loan refinance.

How a conventional loan refinance works

Conventional refinances replace your current mortgage with a new loan with a new rate, term, and monthly payment.

  • A conventional loan refinance replaces your existing home loan with a new one.
  • With a conventional refinance you might be able to secure a lower interest rate, reduce your monthly payment, shorten the loan term, or cash out on the equity in your home.
  • Loan limits vary by state — most states have a maximum limit of $726,200 for one-unit properties, while Alaska and Hawaii have a maximum of $1,089,300.1

To qualify for a conventional loan refinance, you must have a strong credit history, enough equity in your home, and a steady income. Lenders typically require a minimum credit score of 620, a loan-to-value (LTV) ratio of 80% or less, and a debt-to-income (DTI) ratio of 43% or less. Once approved, your new mortgage pays off the balance of your old mortgage, changing the term and interest rate.

By taking advantage of lower refinance rates, you could see significant savings over the life of your mortgage. So, if you want to save money or simplify your monthly mortgage payments, a conventional loan refinance could be just the solution you need. You can use a mortgage refinance calculator to estimate how much less you might pay each month by refinancing.

Conventional loan refinance limits

The maximum amount for a conventional loan refinance depends on where you live. In most states, the maximum loan limit for 2023, known as the conforming loan limit, is $726,200 for a one-unit property—up from $647,200 the year before. In Alaska and Hawaii, the number is $1,089,300. 1

Here's a table of 2023 conventional loan limits per unit:

Units Most States Alaska/Hawaii
One $726,200 $1,089,300
Two $929,850 $1,394,775
Three $1,123,900 $1,685,850
Four $1,396,800 $2,095,200

 

Even with these generous loan limits, your credit score and income still play a crucial role in determining how much you can borrow.

How soon can you get a conventional loan refinance?

Generally, lenders prefer to see that you've made your current mortgage payments on time and have at least 20% equity in your home. Waiting at least six months to a year after your original loan could give you enough time to build up this equity and showcase your creditworthiness.

Keep in mind that many lenders charge closing costs and fees, so rushing into a refinance may not make financial sense. Discover does not charge closing costs, application fees, origination fees, or appraisal fees for refinances.

Looking to refinance your mortgage? Discover® Home Loans offers low fixed rates with terms of 10, 15, 20, or 30 years and $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing. 

Reasons to get a conventional loan refinance

Refinancing a mortgage can be a wise financial decision that can reduce your monthly expenses, free up some cash for other investments, or even allow you to tap into your home's equity to fund a significant life event. There are plenty of reasons to consider refinancing—but knowing when refinancing your home loan is right for you can be challenging.

Here are some reasons why getting a conventional loan refinance makes financial sense:

Lower your mortgage rate

Mortgage interest rates may rise and fall based on several factors but current rates available to you could possibly be lower than your mortgage rate if your credit score has improved since buying your home. Getting a refinanced loan at a lower interest rate can save you thousands of dollars over the life of your loan.

For example, if you have a $250,000 mortgage at a rate of 7% and refinance it to a rate of 6.5%, you will save nearly $30,000 in interest over 30 years. Be sure to calculate closing costs and fees before estimating how much you might save.

Remove mortgage insurance

If you have an FHA loan, you must pay mortgage insurance premiums (MIP) regardless of your down payment. The same is true for private mortgage insurance (PMI), which may be required by your lender if you have a conventional loan and your down payment is less than 20% of the home's value.

Refinancing a conventional loan can eliminate PMI, just like switching to a conventional loan can remove MIP from an FHA loan. Removing MIP or PMI will result in freeing up money dedicated to those payments that you can then save or use as you need it.

Lower your monthly payments

Refinancing can allow you to get a lower interest rate or extend your repayment period, lowering your monthly payments. For example, if you have a 30-year mortgage, refinancing to another 30-year mortgage could result in lower payments.

Lowering monthly payments can also help you reduce your DTI ratio, which is a factor that lenders consider when evaluating your creditworthiness, potentially leading to a lower mortgage rate.

Change your loan type

Switching from an FHA loan or USDA loan to a conventional loan may make financial sense, particularly if your credit score is high enough to qualify for a competitive interest rate. Conventional loans can offer more flexibility with less stringent requirements than government-backed loans. Also, as mentioned before, refinancing from an FHA loan might remove mortgage insurance payments, so long as your new equity is over 20%.

Tap into home equity

You accumulate equity as you make mortgage payments, which is the difference between your home's current value and what you owe on your mortgage. A cash out refinance lets you tap into that equity, allowing you to access funds for home renovations, debt consolidation, or other financial needs. Since interest rates on conventional loans are typically lower than personal loans or credit cards, a cash out refinance could be a smart move to save money on interest charges and pay for the home upgrades you've always dreamed of.

Change your rate type

Another reason to refinance with a conventional loan is to change your rate type. With a fixed-rate mortgage, your interest rate and monthly payments are fixed for the life of the loan. With a variable-rate mortgage, your interest rate can fluctuate based on market conditions, which could result in higher or lower monthly payments depending on those conditions.

You could refinance to a fixed-rate mortgage if you currently have a variable-rate mortgage but want more stability with your monthly payments. On the other hand, if you got a fixed-rate mortgage at a high-interest rate and want to take advantage of low market rates, you can refinance to a variable-rate mortgage.

How to refinance FHA to conventional

Switching to a conventional loan could make sense if you're considering refinancing your FHA loan. While FHA loans are great for qualified homebuyers, a conventional loan can offer lower interest rates and fees in the long run.

The first step is to ensure you have the necessary equity in your home and a strong credit score. From there, it's all about finding the right lender and working with them to get the best possible terms. Remember that many lenders charge closing costs and fees which could offset the savings from a refinance, so consider a lender that waives fees or offers competitive rates.

Conventional vs cash out refinance

A conventional refinance replaces your current mortgage with a new loan with a different rate and term. Using a conventional refinance is an excellent option if you're looking to save money on your monthly payments or pay off your mortgage sooner.

A cash out refinance lets you change the loan’s rate and term while allowing you to borrow more than your current loan’s value, with the difference coming to you in cash. Cash from a cash out refinance can be spent on anything, though many homeowners use it to finance large purchases, consolidate debt, or make home improvements.

Both a conventional refinance and a cash out refinance will replace your current mortgage, but the usefulness of each option depends on your situation and needs.

How does a cash out refinance work?

With a cash out refinance, you'll take out a new mortgage with a larger balance than your current mortgage. The difference between that balance and what you owe on your home is the "cash out." The cash comes from the equity you've built in your home over time.

For example, imagine your home is currently valued at $280,000 and your existing mortgage is $200,000, meaning you’d have $80,000 in equity you can tap. If you take out $230,000 with a cash out refinance, $200,000 will pay off your current mortgage and you'd receive $30,000 in cash. The process is like a traditional mortgage refinance but with the added benefit of being able to withdraw additional funds from your home equity at the same time. Once you've received the cash, you can use it for whatever you like.

Closing thoughts: Conventional loan refinance

Not only might a conventional loan refinance save you money each month, but it provides flexibility to modify the features of your loan to better suit your needs and goals. With a conventional loan refinance, you may reduce your mortgage rate, eliminate mortgage insurance, lower your monthly payments, or change your loan type. Remember to compare lenders before making a decision, you can better understand what range of rates and terms you may be eligible for.

If you’re interested in a conventional loan refinance, check the refinance application checklist to make sure you’re ready for your application.

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