Exploring Conventional Refinance: A Guide to Lowering Your Mortgage Payments

Many homeowners are forced to stay put in their current homes in this market, but that doesn’t mean they have to be stuck with the same mortgage.

Fortunately, there are multiple ways to lower your monthly mortgage payments and add some space to your budget.

What's in this article?

What is a conventional refinance?
Who can get a conventional refinance?
How to lower your monthly payment
Apply for a conventional refinance with Compass Mortgage

The most common way to do this is with a conventional refinance. In this guide, we will show you how to use a conventional refinance to lower your monthly mortgage payments.

What is a conventional refinance?

In the process of refinancing a mortgage, a borrower replaces their current mortgage loan with a new one.

A refinance can serve multiple purposes:

  • Access a lower interest rate
  • Switch to a shorter or longer term
  • Cash out equity
  • Eliminate mortgage insurance

A conventional refinance is one of the most common types because borrowers can qualify regardless of their original mortgage type.

Similar to the conventional purchase process, borrowers will have to meet certain standards set by government-sponsored enterprises Fannie Mae and Freddie Mac.

Let’s take a look at the two types of conventional refinance: rate-and-term and cash-out.

Rate-and-term refinance

As the name suggests, a rate-and-term refinance allows borrowers to change the rate and terms of their original mortgage to fit their unique personal and financial goals.

Borrowers will commonly use a rate-and-term refinance to lower their monthly mortgage payments. We will explore these options in greater detail below.

Cash-out refinance

A cash-out refinance allows borrowers to access cash from the equity they have built up in their homes.

Here’s how it works: Borrowers will replace their current mortgage with a new, larger one that is more than what they currently owe. 

The difference is given to the borrower in cash to use however they’d like.

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Who can get a conventional refinance?

Borrowers can qualify for a conventional refinance regardless of their original mortgage type, including FHA, VA or USDA loans.

Common requirements for a conventional refinance include:

  • Credit score of 620 or higher
  • Employment verification and history
  • Debt-to-income ratio (DTI) at or below 50%
  • Loan-to-value ratio (LTV) of 80% or less, which means you have at least 20% equity in your home

The borrower also will have to pay closing costs, which usually total about 2% to 4% of the loan amount.

How to lower your monthly payment

Now that we’ve provided an overview of your conventional refinance options and who can qualify, let’s dig into the specifics of how to lower your monthly payment with this type of refinance.

Get a lower interest rate

Here’s an example of how interest rates affect your monthly payments: Let’s say you initially purchased a $250,000 home at a 30-year, 7% interest rate and, in the following years, rates dropped to 4%.

With a 7% rate, your monthly principal is $1,663. At your new 4% rate, your principal would be $1,194—a difference of $469 per month.

To benefit from a lower interest rate, borrowers have to keep an eye on the current market to find a rate that works for them.

Additionally, if the borrower’s personal financial situation has improved since they purchased their home, they may also be able to qualify for a lower rate. For example, higher credit scores can help borrowers qualify for lower rates.

To find out your personalized rate, apply for pre-approval with a lender.

Switch to a longer-term

Another way to lower your monthly mortgage payments is by switching to a longer-term length.

If you chose a 15-year or 20-year term length when you first got your mortgage, this means you might switch to a 30-year term.

Or, if you began with a 30-year term, refinancing will simply allow you to restart at 30 years. For example, if you’ve been paying down your mortgage for seven years, you would have a lower total balance and could refinance to a new 30-year term.

On the other hand, a borrower may decide they’d like to pay off their mortgage faster by switching to a shorter term length, such as 15 years instead of 30.

Their mortgage payments will increase, but they will be able to pay it off much faster and save on interest over the life of the loan.

The “right choice” all depends on the borrower’s financial goals.

Eliminate monthly mortgage insurance

The average cost of private mortgage insurance on a conventional loan is 0.5% to 1.5% of the original loan amount per year.

The annual monthly mortgage insurance premium range for FHA loan borrowers is 0.15% to 0.75%.

To eliminate mortgage insurance, borrowers for either loan type—FHA or conventional—should have at least 20% equity in their homes.

Calculate your home equity by subtracting your current loan balance from your home’s value.

The only way to determine your home’s actual value is with an appraisal, but you can estimate this figure by using an online tool such as Zillow or by looking at comparable home sales in your neighborhood.

If you have enough equity in your home, you can eliminate your annual mortgage insurance costs with a conventional refinance.

Apply for a conventional refinance with Compass Mortgage

Are you ready to add some breathing room to your budget by lowering your monthly mortgage payments?

Apply for pre-approval today with Compass Mortgage to find out your interest rate and refinance options.

Beyond a mere pre-approval, Compass offers borrowers our unique Get Committed® program that allows them to lock in their interest rate.

To learn more about our conventional refinance process, including specific requirements, rate-and-term options or cash-out, please reach out to our team today.

At Compass Mortgage, we treat our borrowers like family. Together, we’ll find the most affordable loan option for your home.