Conventional Loan Refinancing Guidelines

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When you take out a mortgage, you aren’t stuck with it forever. If rates fall, you gain equity in your home, or you improve your creditworthiness, refinancing may make sense. You may save money and/or get your hands on some of your home’s equity.

Conventional loans have two refinance options that you can use depending on your reason for refinancing.

Rate and Term Refinance

The rate and term refinance, as the name suggests, is to change your rate or term. Many borrowers use this when interest rates fall or when they have a higher income than when they bought the home and want to lower their loan’s term.

Borrowers can’t take cash out of the home’s equity with this option, but that’s not the point of the program. It’s for borrowers that want a different rate or term whether to save money or to pay off the loan faster.

Most borrowers qualify with the following:

• Minimum 660 credit score
• 97% LTV for a fixed-rate loan or 90% LT V for an adjustable-rate loan
• 28% housing ratio
• 36% total debt ratio
• Stable income and employment

Like the purchase mortgage, conventional loans don’t require owner occupancy to refinance. The home can be a second home or investment home and still qualify.

If you borrow more than 80% of the home’s value, you’ll pay PMI until you have 20% equity in the home.

Cash-Out Refinance

Also known as the debt consolidation loan, the conventional cash-out refinance gives you access to your home’s equity. Borrowers may take out up to 80% of the home’s value, but this includes your first mortgage.

For example, if your home is worth $300,000 and your first mortgage has a $200,000 balance that leaves $40,000 in equity that you can use as you want. Some borrowers use it to consolidate high-interest credit card debt. They pay off the debt with their home’s equity and have one monthly payment.

Other borrowers have other uses for the equity including:

• Home improvements
• Vacation
• Pay for college
• Pay for a wedding
• Pay for medical expenses

Cash-out refinances charge slightly higher interest rates because of the higher risk they pose (you take out your home’s equity, putting the lender at risk). But since conventional loans have attractive terms as it is, the rates are still affordable.

Most borrowers qualifying with the following:

• Minimum 660 credit score
• 80% LTV for a fixed-rate loan and 75% LTV for an adjustable-rate loan
• 28% housing ratio
• 36% total debt ratio (this is where debt consolidation comes in handy)
• Stable income and employment

Reasons to Use the Conventional Loan Refinance

Besides refinancing to lower your conventional loan interest rate or tap into your home’s equity, some borrowers refinance to:

• Refinance out of a government-backed loan, such as FHA or USDA loans that charge mortgage insurance for the life of the loan
• Cancel PMI if they know their home’s value increased enough that they no longer owe more than 80% of the home’s value
• Reimburse themselves after buying a home all cash
• Refinance out of an adjustable-rate mortgage into a fixed-rate mortgage with more predictable payments

FAQ

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How soon can you refinance a conventional loan?

Technically, you don’t have to wait to refinance a conventional loan, but this varies by lender. Some lenders make you wait 6 months, while others will refinance your loan right away. If your lender requires you to wait 6 months, but you want to take advantage of falling interest rates, you can use a different lender and get around the requirement.

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

The amount of equity you need depends on the reason for the refinance. If you’re refinancing from a conventional loan into another conventional loan, you only need 3% equity in the home for a fixed-rate loan and 10% for an adjustable-rate loan.

If you refinance to get cash out of the home, you must have at least 20% equity in the home for a fixed-rate loan and 25% equity for an adjustable-rate loan.

Do you have to use the same lender to refinance a conventional loan?

No, you can use any lender you want when you refinance a conventional loan. I can help you find the lender that’s offering the most attractive terms for you.

Do you lose equity when you refinance?

Your reason for refinancing determines if you lose equity in your home. If you use the rate/term refinance option, you won’t lose any equity unless you wrap the closing costs into your loan. If you pay the closing costs at the closing (in cash), your equity remains the same. You can even pay the balance down and earn more equity in your home.

If you use the cash-out refinance option, then you lose equity in your home because you’re removing it and using it for another purpose. Give careful thought to the reason you’re removing the equity and make sure it aligns with your future financial goals.

Are you Wondering if Refinancing is Right for You?

Refinancing your conventional loan in Colorado is a big decision. You took out a loan originally, knowing its rate and terms. Do you want to change them? Can you afford the closing costs? These are a few factors to consider before you refinance.

If you’re unsure, let’s sit down and discuss your situation. We’ll look at the options you have and see how they affect your financial needs as well as your future mortgage payments. Refinancing is often a great option, especially when you can save money on your payments – I’m happy to help you find the right solution for you.

Purchase Qualifier Refinance Rate Checker