Traditional Refinance

A traditional refinance — formally called a "rate-and-term refinance" — replaces your existing mortgage with a new one for the same remaining balance (or close to it), but with a different interest rate, a different loan term, or both. Unlike a cash-out refinance, you're not borrowing additional funds against your equity; the goal is purely to improve your loan's terms.

The most common reason to refinance is to reduce your interest rate, which lowers your monthly payment and reduces the total interest you'll pay over the life of the loan. But homeowners also refinance to shorten their loan term (e.g., from a 30-year to a 15-year to pay off faster), switch from an adjustable rate to a fixed rate for stability, or remove FHA mortgage insurance once they've built enough equity to qualify for a conventional loan without MIP.

A traditional refinance goes through full underwriting — income verification, credit check, appraisal, and title search — just like your original mortgage purchase loan. The result is a brand-new loan that replaces and pays off the old one.

Traditional refinance eligibility mirrors that of an original mortgage application:

• Credit score: 620+ for conventional rate-and-term refinances. 580+ for FHA refinances. A higher score unlocks better rates; 740+ is the top pricing tier for conventional loans.
• Equity: Most conventional refinances require at least 3%–5% equity (LTV of 95%–97%). If you're underwater (owe more than the home is worth), standard refinancing isn't available — check HARP-successor programs or contact your servicer.
• Avoiding PMI: To refinance out of PMI, you'll need 20% equity at the time of refinancing. A new appraisal is required to establish current value — if your home has appreciated, you may reach 20% sooner than the amortization schedule suggests.
• Debt-to-income ratio: Typically 43%–45% or below based on the new loan payment and all monthly debt obligations.
• Payment history: Most lenders want no late payments in the last 12 months on your current mortgage. Recent missed payments significantly complicate refinance approval.

For a rate-and-term refinance, "down payment" is expressed as equity you already hold:

• No cash needed (typically): Closing costs can sometimes be rolled into the new loan or offset by a lender credit (in exchange for a slightly higher rate). You may need minimal cash at closing, depending on how you structure the deal.
• Rate and credit score: Your rate on the refinance is primarily driven by your credit score, loan-to-value, loan term, and current market conditions. Moving from a 680 to a 740 credit score can lower your rate by 0.25%–0.5%.
• Bringing equity to closing: If your home has lost value and you're above 80% LTV, you may need to bring cash to closing to pay the loan down enough to avoid PMI on the new loan.

Refinancing isn't free — understanding the costs is essential to making the right decision:

• Closing costs: 2–5% of the new loan amount. On a $350,000 loan, that's $7,000–$17,500. These include origination fees, appraisal, title insurance, and prepaid items (taxes, insurance escrow).
• No-closing-cost refinance: Available from most lenders — you pay no upfront costs in exchange for a slightly higher rate (typically 0.125%–0.375% higher). This makes sense if you plan to refinance again or move within a few years and don't want to spend cash upfront.
• Mortgage insurance: If you have less than 20% equity, PMI is required on the new conventional loan. If you're refinancing from FHA to conventional with 20%+ equity, the new loan has no PMI — often a major reason to refinance.
• FHA Streamline and VA IRRRL: Special programs for FHA and VA borrowers that skip the full appraisal and require minimal documentation. Lower cost and faster closing, but must result in a "net tangible benefit" (lower rate or payment).