What is a Conventional Refinance?
A conventional refinance is the process of taking your current mortgage and replacing it with a brand-new home loan. Conventional refinances are very flexible and can be a great way to shorten the duration of your loan term, reduce your interest rate, or even convert some of your home equity into cash.
You don’t necessarily need a conventional loan to do a conventional refinance. In fact, most home loans can be refinanced into a conventional mortgage, such as FHA loans, VA loans, and USDA loans.
What Are My Conventional Refinance Options?
One of the most practical benefits of a conventional refinance is that it gives the borrower the option to tap into their home equity and take out cash to help consolidate debt. Many choose to use this extra cash to help pay for home renovations, medical expenses or even college education.
Being able to shorten the duration of your loan, is another compelling reason to refinance your mortgage. 30 years is a very common duration for a home loan. But refinancing into a shorter loan, such as 20 years or 15 years, will allow you to pay less interest over the life of your loan, effectively spending less money in total.
Reducing your interest rate is another benefit to refinancing your home loan. If interest rates now are lower than they were when you first originated your mortgage, than a refinance might be something to look into.
Conventional refinances can also be used to cancel government-backed mortgage insurance. If you purchased a home using a government-backed mortgage, you’re required to pay a monthly mortgage insurance premium (MIP). If you’ve earned at least 20% equity in your home, you can refinance to a conventional mortgage and eliminate your MIP.
Refinancing isn’t always the right move. There is a time and a place for it. And while it may seem like you’re going to save money with a refinance, it’s important to remember that there are many fees that come with refinancing.
Shortening the duration of your loan may seem enticing since you will be reducing the number of years you will be interest, but it will likely mean increasing the amount you pay each month for the remaining years.
Be sure to consult with a mortgage professional to help determine if a conventional refinance is right for you.