Benefits of Refinancing With a Conventional Loan

Jun 16, 2023 | Mortgage Guides

Unlock Savings: The Advantages of Refinancing with a Conventional Loan

Refinancing with a conventional loan can pose several benefits for the homeowner. A refinance can lower interest rates, free the homeowner from mortgage insurance, change the loan term, and many more benefits. 

This article will cover the financial benefits, other benefits, the cost of refinancing, and everything else a homeowner needs to know about the benefits of refinancing.

Start Your Homebuying Journey Today with Wesley Mortgage

Brief Overview of Refinancing With a Conventional Mortgage

A mortgage refinance involves replacing your existing home loan with a new mortgage with better terms and conditions. It is a tool often employed by homeowners in order to change their loan terms, take advantage of lower interest rates, or access their equity in the home. 

Here is a brief overview of a conventional mortgage refinance:

Assess Your Situation

The first step to refinancing is determining your goals. Common goals are reducing monthly payments, lowering interest rates, accessing the equity in the property, or shortening the life of the loan.

Evaluate Creditworthiness

When applying for a refinance, lenders consider several financial aspects, such as debt-to-income ratio, credit score, late payments, and other factors, to determine your eligibility, interest rates, and loan terms. Having a good credit history and a stable income is crucial to qualifying for a beneficial refinance.

Gather Documents

While not necessary yet, gathering all financial documentation ahead of time will make the refinancing process easier and quicker. Documents like income statements, tax returns, and bank statements may all be required. Contact your lender to inquire about what other paperwork they need, then gather it all together before applying for a refinance.

Apply for Refinance

Fill out and submit the refinance application to the lender. Provide all the documents gathered in the last step, agree to a credit check, and request your desired terms and conditions.

Property Appraisal

In most cases, the lender will arrange a professional appraisal of the refinanced property to determine its market value. They will then review the application, assess the risk involved in the refinance, verify the information provided, and either approve or renegotiate the refinance. 

Benefits of a Conventional Loan

By far the most popular loan for homebuyers, a conventional loan offers several key advantages. With a good credit score and financial history, conventional loans offer better interest rates than most other options. They provide more flexibility in terms of repayment options and loan amounts. 

With a conventional loan, the borrower can choose the loan term, allowing customization of the repayment schedule to suit their fiscal goals. With a 20% downpayment, it is unlikely that the borrower will need mortgage insurance on a conventional loan. Conventional loans often offer higher limits and faster processing than other mortgage options.

Financial Benefits

There are many financial benefits to refinancing a conventional loan. The three main economic benefits are lower interest rates, reduced monthly payments, and cashing out on equity.

Lower Interest Rates

Refinancing to lower interest rates is the most common reason for refinancing. Many different methods can lower interest rates. Refinancing can be done to take advantage of lower market rates. Replacing a home loan that was made when rates were high with a new loan that has lower market rates is a viable option, depending on the current housing market. 

If the homeowner’s personal credit score has improved, refinancing and negotiating interest with an improved credit score is a viable option. Shortening the loan term may also lower interest rates, which may raise monthly payments but will lower the interest on the loan.

Reduced Monthly Payments

Refinancing is often used to reduce monthly payments. Two main methods exist to accomplish this: lower interest and longer loan terms. If one of the above methods is employed to lower interest rates (with the exception of shortening the term), it will likely result in lower monthly payments. 

The other option is to extend the life of the loan. Although this means paying the same amount in total, it will be stretched over a longer period, lowering the monthly payments.

Cash-Out Refinance

Some homeowners refinance a loan higher than the amount owed on their house. This is known as a cash-out refinance, and it allows the homeowner to cash out on some of the equity they have built up over the life of their loan.

Non-Financial Benefits

Other benefits of refinancing may not be financial but may improve the homeowner’s quality of life. The three main non-financial benefits of refinancing a conventional loan are increased equity, more flexible terms, and an improved credit score. These are less common reasons for a refinance and are often secondary benefits to refinancing. 

Increased Equity

Refinancing does not automatically increase equity. It can, however, increase equity depending on the method of refinancing. Refinancing will increase equity if it lowers interest rates because it means more of each monthly payment will go towards principal instead of interest. Shortening the loan term will help build equity by raising monthly payments, meaning more equity is acquired monthly. 

Another option for increasing equity is a cash-in refinance, where the homeowner adds funds with the refinance, reducing the loan amount and growing equity.

More Flexible Loan Terms

Often, homeowners want to renegotiate their loan terms with a refinance. This added flexibility helps them realize their financial goals. A refinance can either extend or shorten the loan term. By extending the loan, monthly payments will be reduced. 

However, the total amount paid will be higher. That can help homeowners who want to put more of their monthly income towards other goals. Conversely, shortening the loan terms raises monthly payments while lowering the total amount owed. That may be ideal for homeowners with the resources and desires to build more equity or pay off their mortgages faster.

Improved Credit Score

Refinancing is not guaranteed to raise credit scores. However, it can have a positive impact. If refinancing allows the homeowner to make more timely payments, it will have a positive effect. Refinancing all debts into one loan can also make debt management easier, improving credit. 

Costs of Refinancing

Refinancing has costs. It is essential to consider these and weigh them against the benefits of refinancing. Calculating at what points benefits will be paid for the costs is vital. If that point is further away than the homeowner plans on living in the house, then refinancing is likely a wrong decision.

Application Costs

Application fees vary depending on the situation and the lender. Most lenders charge $300$ or more to apply for a refinance, regardless of whether the application is approved. That covers the costs of processing and reviewing the application, terms, and documentation involved in the refinance.

Closing Costs

Although they vary, closing costs are often 2-6% of the total amount being refinanced. These costs comprise several different fees, including appraisal fees, government recording costs, tax services, underwriting fees, and more. 

The closing costs can sometimes be rolled into the loan. In most cases, the homeowner pays them in cash. Before refinancing, it is essential to make sure this money is available when closing costs are due.

Early Repayment Penalties

Early repayment penalties are loan clauses implemented on some loans which state that the borrower has to pay a fee if the loan is paid off earlier than the agreed-upon term. If the refinancing loan includes this clause, the borrower must pay the penalty upon refinancing. Check with your lender to inquire about this penalty and see if it applies to you.

The Bottom Line

Refinancing with a conventional loan can offer a range of benefits. It may be an excellent time to refinance, depending on your financial goals. Not only can it provide a lower interest rate and lower payments, but it can also build equity and save thousands of dollars. Moreover, refinancing can allow homeowners to remove mortgage insurance and eliminate the need for a home appraisal. Overall, it can be prudent if you’re looking to save money and build equity.

Contact a representative from Wesley Mortgage at 888-407-2102 or the link below to learn more about how your homeownership dreams can come true.

Start Your Homebuying Journey Today with Wesley Mortgage

View Floor Plans and Get Prequalified For A Home Today


First Name(Required)
Last Name(Required)

View Floor Plans and Get Prequalified For A Home Today


First Name(Required)
Last Name(Required)

View Floor Plans and Get Prequalified For A Home Today

Emily/Parkside Form

First Name(Required)
Last Name(Required)

View Floor Plans and Get Prequalified For A Home Today


First Name(Required)
Last Name(Required)

View Floor Plans and Get Prequalified For A Home Today


First Name(Required)
Last Name(Required)