A conventional refinance is the loan of choice for many homeowners in today’s market. While HARP and FHA have dominated the refinance market in years past, the standard conventional refinance is becoming the go-to option now that home equity is returning across the nation.
With a conventional refinance, homeowners can:
- Refinance a primary residence, second home, or investment property
- Turn the home’s equity into cash at closing
- Eliminate private mortgage insurance (PMI)
- Cancel FHA mortgage insurance
- Shorten the loan term
Conventional refinances rates are low and there are no upfront or monthly mortgage insurance fees required with 20% equity. This is why homeowners are turning to this loan type as a low-cost alternative to other refinance types.
Conventional Refinance Rates
Conventional mortgages are backed by federally controlled agencies Fannie Mae and Freddie Mac. These quasi-government companies purchase loans that meet certain standards, like loan-to-value ratio, credit score, and type of property. This is why conventional loans are often called conforming loans – they must conform to Fannie/Freddie rules.
Banks can lend at very low rates when they approve Fannie- and Freddie-eligible loans. This agency backing translates to a big benefit to the consumer.
Almost every refinance shopper will get a different rate based on their situation. Fannie Mae and Freddie Mac set rate adjustments according to factors in the loan file. For instance, a customer refinancing a rental property will receive a rate that is a quarter to a half of one percent higher than someone refinancing a primary residence. Likewise, someone with a 660 score will receive about a quarter of one percent higher rate than a customer with a 700 score.
In short, conventional refinance rates are based on risk. Get the best refinance rate by being a low-risk borrower. But current rates are such that even mortgage applicants who don’t fit neatly inside a box are getting great rates.
Conventional Streamline Refinance
Refinance shoppers often ask whether there is a conventional streamline refinance similar to an FHA streamline loan that does not require an appraisal or income verification. Many homeowners who have a conventional loan now want to refinance that requires less paperwork.
While there is not an official conventional streamline program, the HARP refinance comes close. Most homeowners do not need an appraisal to use this loan. HARP is open to those with a Fannie Mae or Freddie Mac loan, and since these agencies have an appraisal on record, they usually don’t require another one.
Documentation requirements are lower with HARP, mainly due to computerized approval systems. Most refinance applicants will only need to supply pay stubs, a W2, and a bank statement if any cash is required to close the loan. The borrower can wrap closing costs into the loan, making the HARP program the next best thing to a conventional streamline refinance program.
2016 Conventional Loan Limits
The standard conventional loan limit is $424,100. A qualifying refinance applicant can open a loan for at least this amount anywhere in the country.
But Fannie and Freddie allow higher limits in some areas. For instance, San Diego, California has a conventional loan limit of $612,950. Refinance consumers in Seattle, Washington and Queens, New York can also be approved for a higher conventional loan.
The highest limit in the country is available in Honolulu, Hawaii, at $721,050.
Homeowners in areas with high housing costs should check their conventional loan limit before they assume they need a jumbo loan.
Homeowners who refinance multi-unit homes have access to higher loan limits:
- The conventional loan limit for a 1-unit home: $424,100
- The conventional loan limit for a 2-unit home: $543,000
- The conventional loan limit for a 3-unit home: $656,350
- The conventional loan limit for a 4-unit home: $815,650
Homeowners with multi-unit homes that are also in high-cost areas can receive conventional loans over $1.2 million.
Keep in mind that these are loan limits, not home price limits. Someone refinancing a $2 million home could receive a conventional loan of $424,100 in any area of the country.
How Much Equity do I need for a Conventional Refinance?
Borrowers can receive a conventional refinance with as little as 5% equity in their home. New owners who purchased with an FHA loan are turning to conventional refinances to reduce mortgage insurance costs. Conventional loans with less than 20% equity require private mortgage insurance, or PMI, which costs half of FHA mortgage insurance in some cases. In addition, conventional PMI drops off when you reach 20% equity, while FHA mortgage insurance remains for the life of the loan.
Borrowers with a conventional loan should look into the HARP refinance if they do not have 20% equity. HARP does not require mortgage insurance at all, making it the cheaper option.
For homeowners with 20% or more equity, the decision is easy. Conventional loans don’t require upfront or ongoing mortgage insurance at this loan-to-value ratio.
What Conventional Refinance Loan Lengths are Available?
The most popular conventional refinance loan terms are 15 and 30 years. Fifteen year fixed rates offer substantial interest rate reductions over the 30-year. Ten, twenty and twenty-five year options are also widely available.
Are Adjustable Rate Mortgage Available?
Yes. Conventional refinances are available in an adjustable rate mortgage (ARM), fixed for the first three, five, seven, or ten years. During the initial fixed period, the rate is extremely low. ARMs are great for homeowners who plan to move, refinance, or pay off their mortgage in a few years.
How do I get a Conventional Cash-out Refinance?
A cash-out refinance is a loan that gives the borrower cash at closing. The cash comes from equity in the home. For instance, if a homeowner owes $100,000 on a home that’s worth $200,000, he or she can apply for a loan amount bigger than what they owe. The difference is paid to the owner in cash — figuratively speaking. The amount is typically wired to the borrower’s bank account.
Most lenders can approve a cash-out loan up to 80% loan-to-value ratio. So a homeowner who has 30% equity can take up to 10% of that equity in cash with a cash-out refinance.
Cash-out refinance rates are slightly higher than no-cash-out loans. The difference is about one-eighth of one percent. In numerical terms, it is 0.125% or about $10 more per month in interest for every $100,000 borrowed. Considering the relatively low cost, a cash-out loan is a great way to consolidate high-interest debt and get monthly expenses under control. For many households with a lot of debt from student loans, credit cards, and car loans, a cash-out loan reduces payments by many hundreds of dollars per month.
Conventional Refinance Q&A
Do I have to have a conventional loan now to do a conventional refinance? No. You can refinance any type of loan with a conventional loan. With as little as 5% equity you can refinance
- FHA loans
- USDA mortgages
- Alt-A loans
- Subprime Loans
- Option ARMs
- Adjustable rate mortgages
My appraisal shows a lower value that I expected. Can I still refinance with a conventional loan? Possibly. The refinance may require mortgage insurance. Even with that cost, it still might be worth refinancing. Also, look into a HARP loan, which does not require mortgage insurance.
I’m not sure about my credit. Should I apply for an FHA loan first? You don’t have to pick one program when applying for the loan. The lender will look at your entire situation and try for the lowest cost option. If a conventional loan doesn’t work out, the lender will switch you to an FHA loan. Don’t automatically rule out a conventional loan just because of your credit standing.
What’s the difference between a conventional refinance and HARP? If you have at least 20% equity in your home, you will receive a standard conventional refinance. With less than 20% equity, your loan will be through HARP if you meet the requirements. A HARP loan is simply a conventional refinance that allows you to refi with little or no equity in the home.
Why get a conventional loan? Why not refinance with FHA? FHA can be used to refinance, but it’s typically for homeowners who can’t qualify for conventional due to past credit issues. Because if its flexibility, an FHA refi is more expensive. Most homeowners who can qualify should opt for a conventional refinance.
How do I apply for a conventional refinance? Applying for a conventional refinance is just like applying for any other refinance. Start by checking rates here. The lender will guide you through the rest of the process.
Get Started on Your Conventional Refinance Now
It’s easy to get started. Rates are low and it is a great time to apply for a conventional refinance.
Tim Lucas (NMLS #118763), Editor
Tim Lucas is a mortgage writer with over 11 years of experience as a loan originator, processor, and team manager. Get a live rate quote for your home purchase or refinance at MyMortgageInsider. Visit Tim on Google+, Twitter, and Facebook.