Refinancing a conventional loan

What you need to know before refinancing your conventional loan

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To determine if refinancing your conventional loan is worth the costs, you’ll need to weigh those fees against your potential future savings. And refinancing isn’t for everyone — make sure your credit is where it needs to be and compare your options before deciding if refinancing a conventional loan is right for you.

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Can I refinance a conventional loan?

If you’re looking to lower your monthly payments or you’re trying to pay off your mortgage faster, refinancing your conventional loan is certainly an option. And depending on how your financial needs change over time, you can refinance as many times as you need.

Each lender has different rules about how quickly a loan can be refinanced, and some have prepayment penalties. Though they’re not as common as they used to be, check with your lender to make sure there isn’t a prepayment clause in your loan.

How do I refinance a conventional loan?

Refinancing your conventional loan starts with shopping around for the lowest rates and fees. Once you find a lender who meets your needs, you’ll then:

  • Fill out the loan application with your personal information and monthly debt payments, and disclose whether or not you’ve had a bankruptcy or foreclosure.
  • Once your lender takes a look at your credit score, they’ll ask for copies of financial documents such as W-2s or tax returns, current bank statements and your two most recent pay stubs.
  • Next, get an appraisal of your home.
  • Review the terms and conditions of your loan, paying special attention to the down payment requirement and length of the repayment term.
  • With interest rates rising, you’ll want to explore the option to lock in your interest rate. This will freeze your interest rate for 30 to 60 days or more.
  • If your lender approves your request to refinance, you’ll get a scheduled date to complete the closing process. Though you’ll have a general idea beforehand, this is when you find out exactly how much your closing costs will be

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When can I refinance my conventional loan?

While there’s no set time before you can refinance, each lender has their own policies and terms. Most lenders won’t refinance a mortgage that they’ve issued in the last four to six months. If you’re set on refinancing and fall within that time range, you may have to look for a new lender.

Keep in mind that closing costs can be expensive, so it may not make sense to refinance frequently.

The benefits of refinancing a conventional loan

The most common reason to refinance a mortgage is to take advantage of a drop in interest rates. But there are other benefits, as well as drawbacks, to consider.

The benefits

  • Lower interest rate. If rates have improved since you first took out your loan, you might benefit from refinancing into a lower-rate mortgage.
  • Lower monthly payment. A lower interest rate will result in a lower monthly payment as well.
  • Cash out on equity. If you’ve paid down enough of your mortgage, you can tap into the equity in your home.
  • Change terms of loan. Change from a 30-year mortgage to a 15-year one to pay off your loan sooner, or vice versa.

What to watch out for

  • Some lenders charge a prepayment penalty, which can cost you as much as six months of interest payments.
  • Closing costs average between 2% and 5% of the loan amount. That means to refinance a $200,000 mortgage, you’ll have to bring $4,000 to $10,000 to the closing table.
  • Conventional mortgages have strict credit requirements. You might not qualify for the best terms and interest rates if you have a mediocre credit score.
  • If there’s been any change in your income and credit since applying for your original mortgage, you may not qualify for refinancing, or you might get approved but at a much higher interest rate.
  • In some cases, appraisers are forced to use foreclosed properties in the area for cost comparisons, and this will significantly lower the value of your home. A lower than expected appraisal can reduce your chances of being approved.

Am I eligible to refinance my conventional loan?

Refinancing a conventional loan has many of the same eligibility requirements as your first mortgage. To be eligible, you’ll need:

  • A credit score of at least 620, though 700 or higher is best.
  • At least 20% of equity in your home.
  • Closing costs of 2% to 5% of the loan.
  • Sufficient income to cover the cost of the loan.
  • To provide pay stubs, W-2s and bank statements.
  • Solid and reliable job history or self-employed for at least two years.
  • A debt-to-income ratio below 45% to 55%.

Bottom line

Depending on your goals, refinancing your conventional loan can lower your monthly payments or help you pay off your mortgage in less time. But refinancing will cost you 2% to 5% of the loan balance in closing costs. Use our Switching Costs Calculator to see how much you can save.

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