How Do You Refinance a Conventional Loan — and When Does It Make Sense?
Refinancing a conventional loan can lower your rate, reduce your term, or put cash in your pocket — but the timing, the costs, and the qualification rules all matter. Here is the full picture.
Two types of conventional refinance
Rate-and-term refinance: You replace your existing mortgage with a new one at a different rate and/or term. No cash is taken out beyond what covers closing costs. This is the most common refinance and typically carries the most favorable pricing.
Cash-out refinance: You borrow more than you owe on the existing mortgage and receive the difference as cash. You can use it for any purpose. Cash-out refinances have stricter LTV limits and carry higher loan-level price adjustments.
Seasoning requirements
For cash-out refinances paying off a first lien, that mortgage must be seasoned for at least 12 months as of the new note date. You must also have owned the property for at least 6 months before the new closing. If the property was recently listed for sale, it must be removed from the market before closing.
Continuity of obligation
For rate-and-term refinances, at least one borrower on the new loan must have been on the title and the existing mortgage. Properties owned free and clear are exempt. This prevents unrelated parties from refinancing a loan they were never part of.
LTV limits for refinancing
| Transaction Type | Property Type | Max LTV (DU) |
|---|---|---|
| Rate/Term Refinance | Primary residence (1 unit) | 97% |
| Rate/Term Refinance | Second home | 90% |
| Rate/Term Refinance | Investment (1 unit) | 75% |
| Cash-Out Refinance | Primary residence (1 unit) | 80% |
| Cash-Out Refinance | Second home | 75% |
| Cash-Out Refinance | Investment (1 unit) | 75% |
When does refinancing make sense?
The classic rule of thumb is to refinance when you can lower your rate by 0.5%–1.0% and your break-even point is within the time you plan to stay in the home. Divide closing costs by monthly savings to find your payback period. If you plan to stay past that point, refinancing likely makes financial sense.
Key takeaways
- Rate-and-term refinance: change your rate or term with no cash out.
- Cash-out refinance: borrow more than you owe; difference comes to you as cash.
- Cash-out requires the existing first lien to be seasoned at least 12 months.
- Continuity of obligation: at least one borrower must have been on the original mortgage.
- Max LTV for cash-out: 80% on primary; 75% on second homes and investment properties.
- Break-even analysis: divide closing costs by monthly savings to find your payback period.
Ready to explore your conventional loan options? Lendia can walk you through what you qualify for and find the right program for your goals.