Understanding Conventional Refinancing: 2026 Guidelines and Requirements

Conventional refinancing may sound intimidating, but once you understand the process, you’ll find that it makes perfect sense and can dramatically improve your personal finances in the right circumstances.

When Should I Refinance?

There are several situations when a conventional refinance could make sense for you:

When You Can Get a Lower Interest Rate

With a conventional refinance, you can get a lower interest rate if current interest rates are lower than when you originated your loan. You could also get a lower interest rate if you have substantially improved your credit score since originating your current loan. Either way, a lower interest rate translates into lower monthly payments for you over the remaining term of the loan.

When You Want to Remove Private Mortgage Insurance (PMI)

Removing private mortgage insurance (PMI) is another reason a conventional refinance may interest you. If your current loan requires PMI because of your down payment, you can use a conventional refinance to remove it once you have enough equity in your property (typically 20%).

With FHA loans, the mortgage insurance premium usually lasts the life of the loan, unless you made a down payment of 10% or more, in which case it ends after 11 years. If you currently have an FHA loan with FHA mortgage insurance, you may be able to cancel said insurance through a conventional refi loan, also reducing your monthly mortgage payments.

When You Need Different Loan Terms

Switching to a longer loan term could mean lower monthly payments over the lifetime of your loan. If you divide the remaining balance on your loan by a new 30-year loan term, your monthly payments will probably be lower than your current payments. Just know that you would likely pay more in interest over the long term.

When You Want to Tap Into Your Home’s Equity

One of the most attractive conventional refinance perks is the ability to tap your home equity. To do this, you would need to explore a cash-out refinance.

When You’re Moving From FHA, VA, or USDA to Conventional

Several government-backed mortgages, like the VA loan, require you to have a loan in the same program to use that refinance product. A conventional mortgage allows you to refinance out of any loan type, meaning you can refinance your FHA loan to a conventional loan, your USDA loan to a conventional loan, and so on.

Pros and Cons of Refinancing

As with most financial decisions, refinancing has pros and cons.

Pros of Refinancing

• With a lower interest rate, you can reduce your monthly mortgage payment and reduce the amount you pay over the long term.

• If you can eliminate PMI or MIP, you can reduce your monthly payment.

• Refinancing to a shorter term can reduce your total interest expense over the term of the loan.

• Refinancing to a longer term can reduce your monthly payments.

• A cash-out refinance allows you to use your home equity to put cash in your pocket.

• A cash-in refinance can lower your total interest expense and potentially allow you to remove PMI, reducing your monthly payment.

Cons of Refinancing

• Refinancing can be a hassle since you must provide the necessary paperwork to qualify for the loan. New loan documentation also must be signed.

• Refinancing costs money. Even though you can probably roll the expense into your new loan, you will still pay the fees.

• The refinance process can take several weeks.

• Refinancing may result in higher finance charges over the life of the loan.

What Are the Costs to Refinance?

Refinancing usually costs 2% to 6% of the loan amount. This includes lender fees, appraisal, title, and other closing costs.

The good news is that you typically don’t have to pay this amount upfront; your lender can usually roll these costs into your loan, so you pay them over the term of your new loan as part of your mortgage payment. And if you’re saving money by getting a lower interest rate or removing mortgage insurance, the cost to refinance can be money well spent.

For Example: If you refinance a $300,000 loan and your closing costs are 3% of the loan amount, you’ll pay about $9,000 in fees. If your new rate reduces your monthly mortgage payment by $250, you’ll break even in 36 months ($9,000 ÷ $250). After that, the savings are yours for the remainder of the loan term.

How to Calculate Your Break-Even Period

• Add up your total refinance costs.

• Divide that number by the amount you’ll save each month on your mortgage.

• The result is the number of months it will take before your refinance starts saving you money.

• If you expect to stay in your home longer than this break-even period, refinancing is more likely to pay off.
  

Conventional Refinance Requirements

To get a conventional refinance, there are a few basic requirements.

First, you need good enough credit to qualify for a conventional loan. Lenders typically look for a credit score of at least 620. This can be higher than the credit score required for government-backed loans, but conventional loans can have better interest rates that justify the higher credit score requirement.

Then, you need enough equity in the home to qualify for a conventional refinance. The required equity depends on the type of refinance:

• You typically need at least 5% equity for a conventional refinance, though requirements may vary by lender.

• For a cash-out refinance, you generally need at least 20% equity.

• If you refinance from a jumbo loan to a conventional loan, you’ll need equity somewhere between 10.1% and 25%, depending on the loan amount.

Finally, you need to demonstrate that you have enough income to cover your new mortgage payment. Your lender will look at your debt-to-income ratio to see how much of your income is allocated to paying down debts like student loans, auto loans, credit cards, and your new mortgage. Most lenders require a debt-to-income ratio of 50% or less for a conventional refinance. Government-backed loans, such as FHA, may allow higher ratios.

FAQs

Is Refinancing Right for You?

Conventional refinancing is flexible enough to be a solid mortgage solution for many homeowners. It might be the right fit for you if you want to lower your monthly payment, reduce your interest expense, or get cash out of your home’s equity.

Refinancing may result in higher finance charges over the life of the loan.