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.
The steps from decision to closing
- Set the goal. Lower payment, shorter term, cash out, or removing PMI. The goal decides the loan type.
- Collect current numbers. A recent mortgage statement, your property tax bill, and homeowners insurance declarations.
- Apply and review the Loan Estimate. Compare the closing costs and the rate, with and without points.
- Lock when the numbers work. Locks commonly last 30 to 60 days.
- Appraisal and underwriting. Some refinance files need a full appraisal; the lender tells you what applies.
- Review the Closing Disclosure and sign. It must be in your hands at least 3 business days before closing.
A break-even example (illustrative example, not a quote)
Closing costs on a refinance are $9,000, and the new payment is $300 a month lower than the old one. $9,000 ÷ $300 = 30 months. If you expect to keep the home and the new loan for more than two and a half years, the refinance comes out ahead on payment savings alone. If you might sell in 18 months, it does not.
Two cautions on this math. First, if you roll the $9,000 into the new balance, the balance goes up and the monthly savings shrink. Second, restarting a 30-year clock on a loan you have paid for six years stretches the total interest you pay, even when the monthly payment drops. Compare total cost, not only the payment. The refinance calculator can help.
Common mistakes
- Choosing a lender on the headline rate without comparing the Loan Estimate fees.
- Skipping the PMI check. If the home has gained value, your new loan-to-value may be low enough to drop PMI.
- Refinancing a short-lived loan repeatedly without counting the costs each time.
Frequently asked questions
Can I refinance into a shorter term and keep a similar payment?
Sometimes. A 15-year loan carries a higher payment than a 30-year on the same balance, but a lower rate and the equity built over the years can narrow the gap. We run both side by side.
How soon after buying can I refinance?
The cash-out seasoning and ownership requirements above apply to cash-out. A rate-and-term refinance has other rules, including the continuity of obligation, and the new lender will confirm what applies to your property.
Do I need new income documents?
Typically yes. A refinance is underwritten like a new loan, with income, assets, and credit reviewed again.
Related guides
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.
- Divide total closing costs by monthly savings to estimate months to break even.
- Rolling costs into the loan raises the balance, so recheck your savings after you add them.
- A refinance can end PMI if the new loan-to-value is at or below 80%.
Ready to explore your conventional loan options? Lendia can walk you through what you qualify for and find the right program for your goals.