Conventional Mortgage Refinancing
Conventional refinancing may allow eligible homeowners to replace an existing mortgage with a new conventional loan. Depending on the homeowner's goals and qualifications, refinancing may be used to change the loan structure, adjust the repayment term, access available equity, or pursue other financial objectives.
What Is It?
What Is Conventional Refinancing?
A conventional refinance replaces an existing mortgage with a new mortgage that is not insured or guaranteed by a federal government agency such as FHA or VA.
The new mortgage is used to pay off the existing mortgage.
"Refinancing does not eliminate mortgage debt — it replaces an existing mortgage with a new loan."
Common Reasons
Why Homeowners Consider Refinancing
Homeowners may consider refinancing for a variety of reasons. Common motivations include:
- Change the interest-rate structure
- Change the repayment term
- Convert from an adjustable-rate mortgage to a fixed-rate mortgage
- Potentially reduce the monthly principal-and-interest payment
- Access available home equity
- Remove or add a borrower when permitted
- Consolidate certain debts when appropriate
- Change from another mortgage program to conventional financing
Refinancing does not automatically lower a homeowner's payment, rate, or total borrowing cost.
Rate-and-Term Refinance
Rate-and-Term Refinance
A rate-and-term refinance generally replaces an existing mortgage primarily to change the interest rate, loan term, or mortgage structure without taking significant cash from the property beyond amounts permitted under applicable program guidelines.
Potential goals may include:
- Changing the interest rate
- Changing the loan term
- Moving from an adjustable-rate to a fixed-rate structure
- Restructuring the existing mortgage
Savings are not guaranteed.
Cash-Out Refinance
Cash-Out Refinance
A cash-out refinance may allow an eligible homeowner with sufficient equity to obtain a new mortgage larger than the amount needed to pay off the existing mortgage and receive eligible proceeds from the transaction.
Potential uses may include:
- Home improvements
- Debt consolidation
- Education expenses
- Investment or business purposes
- Major expenses
- Other financial objectives
"Using home equity increases or restructures debt secured by your property and should be evaluated carefully."
Home Equity
Home Equity
Home equity generally represents the difference between the property's value and debts secured by the property.
Available equity does not automatically mean the entire amount can be borrowed. The amount potentially available depends on:
- Property value
- Existing mortgage balance
- Loan program
- Loan-to-value requirements
- Borrower qualifications
- Property type
- Occupancy
- Lender guidelines
Qualification
Credit and Qualification
Conventional refinance qualification may consider:
- Credit profile
- Income
- Employment
- Assets
- Existing debts
- Debt-to-income ratio
- Property value
- Property type
- Occupancy
- Mortgage payment history
- Available equity
No universal minimum credit score or maximum debt-to-income ratio is published here.
The Appraisal
Property Valuation
Depending on the loan program and transaction, a property appraisal or another acceptable valuation method may be required. The valuation can help determine:
- Property value
- Available equity
- Loan-to-value ratio
- Eligibility for the requested refinance
An appraisal waiver is not guaranteed.
Closing Costs
Refinance Closing Costs
Refinancing can involve costs such as:
- Lender charges
- Appraisal or valuation costs
- Title charges
- Settlement charges
- Recording fees
- Prepaid interest
- Escrow funding when applicable
- Other transaction expenses
"A lower monthly payment does not automatically mean the refinance has a lower overall cost."
Break-Even
Break-Even Considerations
A homeowner considering refinancing may want to compare the cost of obtaining the new mortgage with the potential monthly or long-term financial benefit.
For example, if refinancing involves closing costs but lowers a monthly payment, the homeowner can consider how long it may take for the monthly difference to offset those costs.
No guaranteed savings calculator is provided here.
Loan Term
Shorter vs. Longer Loan Terms
Shorter Term
A Shorter Term May Potentially
- Increase the monthly payment
- Reduce the number of years of repayment
- Reduce total interest paid, depending on the loan terms
Longer Term
A Longer Term May Potentially
- Reduce the required monthly principal-and-interest payment
- Extend the repayment period
- Increase total interest paid over time
Individual results depend on the specific loan terms.
Mortgage Insurance
Removing Private Mortgage Insurance
Depending on the existing mortgage, property equity, new loan structure, and applicable guidelines, refinancing may sometimes result in a mortgage structure that does not require private mortgage insurance.
PMI removal is not guaranteed.
FHA to Conventional
Refinancing from FHA to Conventional
Some eligible homeowners with an FHA mortgage may consider refinancing into conventional financing. Potential reasons can include:
- Changing mortgage structure
- Different mortgage-insurance treatment
- Different loan terms
- Other financial objectives
Investment Properties
Refinancing an Investment Property
Conventional financing may potentially be available for eligible investment properties, but requirements can differ from owner-occupied properties.
Investment Property Refinancing will be covered in a dedicated section.
Important Considerations
When Refinancing May Not Make Sense
Refinancing is not automatically beneficial. Factors homeowners should consider include:
- Closing costs
- Current mortgage rate
- New mortgage rate
- Remaining loan term
- New loan term
- How long they expect to own the property
- Equity
- Monthly payment changes
- Total borrowing cost
- Financial goals
"Refinancing should be evaluated based on the complete financial picture, not simply the advertised interest rate."
Ask a Professional
Questions to Ask Before Refinancing
- What is my current mortgage rate?
- What is my remaining balance?
- What is my estimated property value?
- How much equity do I have?
- What would my new interest rate be?
- What would my new monthly payment be?
- What are the estimated closing costs?
- Will the loan term restart or change?
- How long do I expect to keep the property?
- Am I taking cash out?
- What is the estimated break-even period?
- How does the new loan compare with keeping my current mortgage?
The Big Picture
"A refinance should have a clear financial purpose."
Prosper Path Group can help homeowners review their existing mortgage, property, equity, financial profile, and goals to explore available refinance options. Refinancing may not benefit every homeowner, and each situation should be evaluated individually.
Ready to Begin?
Explore Your Refinance Options
Every homeowner's situation is different. Prosper Path Group can help you review your existing mortgage and explore conventional refinance options based on your property, financial profile, equity, and goals.
Refinance programs, rates, terms, costs, equity requirements, loan-to-value limits, credit requirements, appraisal requirements, cash-out availability, and borrower eligibility vary by lender, loan program, property, occupancy, borrower circumstances, and market conditions. Refinancing may increase the total finance charges over the life of the loan and may not be appropriate for every homeowner. Not all borrowers or properties will qualify. This information is provided for general educational purposes and is not a commitment to lend.
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