Conventional Refinance Loan: Is it worth it?
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December 23, 2022

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If you’re considering a conventional loan refinance, there are a few things you should know. 

This type of loan can be a great way to save money on your mortgage, but it’s not suitable for everyone.

As a homeowner, you want to get the best possible deal on your mortgage. But what is a conventional refinance loan, and how does it work? Let’s take a look.

What is a conventional refinance?

A conventional refinance is the process of replacing an existing mortgage with a new one with different terms. This can include changing the length of your loan, the interest rate, or even switching from a fixed-rate to an adjustable-rate mortgage.

Several factors go into a person’s decision to refinance their mortgage. 

Some want to reduce their monthly expenses, while others are interested in rapid loan payoff. It’s also possible to refinance an FHA loan into a new conventional loan. 

Some homeowners tap into refinancing as a way to access the equity built up in the home for other pursuits like debt consolidation or home improvements.

No matter your reason for wanting to refinance, it’s essential to understand how the process works and what you can expect.

Get your refinance rate

The benefits of a conventional refinance

Before you decide to refinance your mortgage, it’s important to weigh the pros and cons. On the plus side, a conventional refinance can offer some great benefits.

Lower monthly payment

If you’re struggling to make your current mortgage, refinancing a loan with a lower interest rate could help reduce your monthly payment.

Shorter or longer loan term

If you want to be debt-free sooner, you can refinance to a shorter loan term. This will likely increase your monthly payment, but you’ll pay off your loan faster. 

Some homeowners choose to refinance from a 15-year mortgage to a 30-year. Even though the term is longer, this lowers their monthly payment.

Access to equity

If you have built up equity in your home, you may be able to tap into it through a cash-out refinance. This can give you the money you need for home improvements or debt consolidation.

Change interest terms

A fixed interest rate is a good idea if you have an adjustable-rate mortgage (ARM). This way, you’ll have stability and peace of mind knowing that your payment will always be the same.

Get rid of conventional PMI

If you originally purchased the home with less than 20% down, you’re required to pay for private mortgage insurance (PMI), which adds to your monthly payment. Homeowners can refinance to get rid of pesky PMI once they reach 20% in home equity. 

Should I refinance my conventional mortgage?

Now that you know some of the benefits of refinancing a conventional loan, you may wonder if it’s the right move for you. The answer depends on your circumstances.

If you’re looking for a lower monthly payment, a shorter loan term, or access to equity, then refinancing to a conventional loan could be a good option. 

However, if you’re happy with your current loan and don’t need any of those things, then there’s no need to refinance. Refinancing also may not be worth it if you plan to sell and move soon. 

It’s important to remember that refinancing comes with some costs, such as appraisal, origination, and closing costs. So, factor those into your decision before you commit to anything.

What is needed for a conventional refinance loan?

If you’ve decided that refinancing a conventional loan is the right move, you’ll need to gather some documentation. 

This includes:

  • Most recent mortgage statement
  • Most recent mortgage payment coupon
  • Homeowner’s insurance policy
  • Property tax bill
  • Proof of income (W-2 forms, pay stubs, tax returns)
  • Proof of assets (bank statements, investment account statements)

Once you have all that documentation, you’ll need to complete a mortgage application. This is where you’ll provide information about yourself and your finances. If you’ve worked with this lender previously, you may be able to just quickly update personal information, if need be. 

Refinance with AAA Banking

After you submit your application, the lender will order an appraisal of your home to determine its current value. They’ll also pull your credit report and verify your income and assets.

Once that is done, you’ll be ready to close on your loan and enjoy the benefits of a lower interest rate and monthly payment.

How much equity do you need to refinance a conventional loan?

This answer may vary by lender. If you’re looking to do a cash-out refinance, you generally need at least 20% equity in your home. Your loan balance should be no more than 80% of your home’s value.

Keep in mind that the higher your loan-to-value ratio is, the higher your interest rate will be. It may be better to wait until you have more equity in your home to refinance, especially if you plan to do a cash-out refinance.

No matter how much equity you have, refinancing a conventional loan could still be a good option if you’re looking for a lower monthly payment.

Conventional refinance calculator

Before you decide to refinance, calculate the costs and compare them to the savings you’ll get from a lower interest rate.

Our conventional refinance calculator can help you do just that. Input your information into the calculator, and it will show you how much you can save each month.

What if I want a conventional cash-out refinance?

A conventional cash-out refinance option is available for homeowners with over 20% equity. This option allows home buyers to trade in their old mortgage plus take out cash totaling up to 80% loan-to-value ratio of their home’s value.

For example, if your home is worth $300,000 and you owe $100,000 on your current mortgage, you can cash out refinance for $160,000, which is 80% of your equity. This would give you $60,000 in cash to use however you want.

Just like with any other mortgage, there are some costs associated with a cash-out refinance. These costs include appraisal, origination, and closing, so make sure you factor those into your decision.

A cash-out refinance can be a good option if you’re looking for a way to access some of the equity in your home. Just make sure you understand the costs before you decide to do anything.

How do I apply for a conventional refinance loan?

If you’re interested in refinancing a conventional loan, contact a trusted mortgage lender, such as AAA Banking.

Our experienced team can help you with the mortgage application process and give you more information about how to qualify for a conventional loan.

If you’re looking to lower your monthly payment or access equity in your home, then refinancing could be a good option. However, it’s essential to factor in refinancing costs before you commit to anything.

Let AAA Banking guide you through the process and help you make smart financial decisions. Call us at (844) 897-2265, loan officers are available Monday-Friday from 8:00 am to 8:00 pm EST.

Start your refinance

Photo by Tima Miroshnichenko

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