A conventional rate and term refinance loan is a type of mortgage refinancing where the borrower seeks to replace their existing mortgage with a new one that has different terms, such as a new interest rate or loan duration. This type of refinance is created to take advantage of better interest rates, adjust the loan term, or switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or from a fixed rate mortgage to a adjustable-rate mortgage.

• Lenders have specific requirements for the maximum loan-to-value ratio, which represents the percentage of the home’s appraised value that can be borrowed. In most cases, conventional rate and term refinance loans allow a maximum LTV ratio of 80%, although this can vary depending on the lender and the borrower’s financial profile.

• Borrowers need to meet the lender’s creditworthiness criteria to qualify for a conventional rate and term refinance loan. This involves a review of the borrower’s credit score, credit history, and overall creditworthiness. A higher credit score and a solid credit history can increase the chances of loan approval and potentially secure more favorable interest rates.

• Lenders evaluate the borrower’s income and debt-to-income ratio (DTI) to ensure they have the ability to make the mortgage payments. The specific DTI requirements can vary, but generally, a lower DTI ratio is preferable. Borrowers will need to provide documentation of their income, such as pay stubs, tax returns, and other relevant financial documents.

• A new appraisal may be required for a conventional rate and term refinance loan to determine the current value of the property. However, in some cases an appraisal waiver may be issued during underwriting, effectively removing the cost and need of having a traditional appraisal report.

• Refinancing one’s home loan requires meeting similar eligibility criteria as obtaining a new mortgage, including credit score(s), income verification, and sufficient home equity. If a homeowner’s financial situation has worsened since they obtained their original mortgage, they may face challenges in qualifying for a refinance.

• With a rate and term refinance, borrowers can choose different loan terms in comparison to their existing mortgage. Borrowers may choose to refinance to a shorter loan term, such as changing from a 30-year to a 15-year mortgage. While such action will likely result in higher monthly payments, it will also provide significant interest savings over the life of the loan.

• Refinancing typically involves closing costs and fees, including appraisal fees, application fees, title fees, and other related expenses. It’s important for borrowers to carefully review and understand the costs associated with the refinance to determine if the potential savings from a lower interest rate or other benefits outweigh the expenses.

• While extending the loan term can reduce monthly payments, it also means paying interest for a an extended period, which can lead to higher overall interest costs over the life of the loan. Thus, if a borrower chooses to extend the loan term to lower monthly payments, they will likely pay more interest over the life of the loan, even with a lower interest rate.

A conventional rate and term refinance loan is subject to the guidelines and criteria of the specific lender. Consulting with a mortgage broker can help borrowers navigate the process and determine if a conventional rate and term refinance loan is the right option for their financial situation.