Conventional loan refinance: Limits and guidelines

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A conventional loan refinance could be a game-changer for your finances by helping 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 this option.

How a conventional loan refinance works

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

You might be able to secure a lower interest rate, reduce your monthly payment, shorten your loan term, or cash out on the equity in your home.
2024 loan limits vary by state, with most states having a maximum limit of $766,550 for one-unit properties. Alaska, Guam, Hawaii, and the U.S Virgin Islands have a maximum of $1,149,825.

A strong credit history, enough equity in your home, and a steady income may increase your chances of securing a conventional loan refinance. 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 may see significant savings over the life of your mortgage.

You can use a mortgage refinance calculator to estimate how much less you might pay each month.

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 2024, known as the conforming loan limit, is $766,550 for a one-unit property—up from $726,200 the year before. The number is $1,149,825 in Alaska , Guam, Hawaii, and the U.S. Virgin Islands.

Here's a table of 2024 conventional loan limits per unit:

Units	Most States	Alaska/Guam/Hawaii/U.S. Virgin Islands
One	$766,550	$1,149,825
Two	$981,500	$1,472,250
Three	$1,186,350	$1,779,525
Four	$1,474,400	$2,211,600

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.

Keep in mind that many lenders charge closing costs and fees, so rushing into a refinance may not make financial sense. Discover® Home Loans 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

Here are some reasons why getting a conventional loan refinance might be a good idea:

Lower your mortgage rate

Mortgage interest rates may rise and fall based on several factors. However, current rates could possibly be lower than your current rate if your credit score has improved since buying your home. Getting a refinanced loan at a lower interest rate can save you money 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 when working out how much you could 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) on a conventional loan, which your lender might require if your down payment is less than 20% of your home's value.

Refinancing a conventional loan can remove PMI, just like switching to a conventional loan can remove MIP from an FHA loan. Eliminating MIP or PMI free up money that you can t save or use when needed.

Change your loan type

Switching from an FHA or USDA loan to a conventional loan could be a smart move, 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

Tap into home equity

As you make mortgage payments, you can accumulate equity, 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 and access funds for home renovations, debt consolidation, or other financial needs. Since interest rates on conventional loans are typically lower than personal loans and 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.

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 lower market rates, you can refinance to a variable-rate mortgage.

How to refinance FHA to conventional

You could switch to a conventional loan if you're considering refinancing your FHA loan. While FHA loans can be great for some homeowners, a conventional loan might offer lower interest rates and fees.

The first step is ensuring you have the right amount of 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 many lenders charge closing costs and fees that could offset the savings from a refinance, so consider a lender that waives fees or offers competitive rates.

Conventional loan refinance vs cash out refinance

A conventional loan refinance replaces your current mortgage with a new loan with a different rate and term. It might be 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 your loan’s rate and term while borrowing more than what you currently owe, with the difference coming to you in cash. You can spend this money on anything, though many homeowners finance large purchases, consolidate debt, or make home improvements.

The value of each option will depend 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.

Say your home is worth $280,000 and your existing mortgage is $200,000, meaning you have $80,000 in equity. 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 withdrawing additional funds from your home.

Closing thoughts: Conventional loan refinance

A conventional loan refinance might save you money each month and let you modify your mortgage to better suit your needs and goals. For example, you can reduce your current mortgage rate, eliminate mortgage insurance, lower your monthly payments, or change your loan type. Remember to compare lenders before making a decision so, you can better understand what rates and terms you may be eligible for.

If you’re interested in a conventional loan refinance, check out this refinance application checklist.

The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank, its affiliates, or successors.