Do you currently have a USDA loan? The U.S. Department of Agriculture backs loan programs designed to help low- to moderate-income individuals and families buy homes in eligible rural areas.
However, a USDA loan might not be the long-term financing option you’re looking for — especially if you plan on converting your home into a rental property or need to access your equity. In this article, we’ll cover a few reasons why refinancing a USDA loan into a conventional loan might make sense and what the process entails.
Why Refinance from a USDA Loan to a Conventional Loan?
While the USDA loan program offers valuable benefits — like low interest rates and flexible credit requirements — it also comes with certain limitations. If your financial goals or housing plans have changed, here are the main reasons you might consider refinancing into a conventional loan.
Cash Out Home Equity
USDA loans do not allow cash-out refinancing, which means you can’t tap into your home’s equity through a USDA refinance. To access your equity — whether for home improvements, debt consolidation, or other financial goals — you’ll need to refinance into a conventional or FHA loan.
USDA loans also prohibit secondary financing like home equity lines of credit (HELOCs), further limiting your options until you switch loan types.
Owner-Occupancy Changes
USDA loans are intended for owner-occupied primary residences. If you plan to convert your home into a rental property, refinancing within the USDA program likely won’t be an option — and buying a new primary residence while keeping your USDA loan could violate program guidelines.
Refinancing into a conventional loan removes those occupancy restrictions and gives you more flexibility for how you use the property going forward.
Remove USDA Guarantee Fees
USDA loans don’t have private mortgage insurance (PMI), but they do charge an upfront guarantee fee and an annual fee added to your monthly payment — costs that function similarly to mortgage insurance.
If you refinance into a conventional loan and have at least 20% equity, you can eliminate both the USDA fees and conventional PMI, potentially reducing your overall monthly cost.
Shorten Your Loan Term
USDA loans are only available with a 30-year repayment term. Refinancing into a conventional loan gives you the flexibility to choose a 10-, 15-, or 20-year term if you’d like to pay off your mortgage sooner.
USDA Refinancing
The USDA does offer refinancing options, but the same program restrictions apply — which is why many borrowers ultimately pursue a conventional loan instead. There are three main USDA refinancing options:
- USDA Streamlined-Assist Refinance — Best for lowering your interest rate and monthly payment. Available even with minimal home equity, and no appraisal or credit check is required.
- USDA Streamlined Refinance — Similar to the Streamlined-Assist, but requires a credit and income check. No appraisal required. Learn more about both USDA streamlined refinance options here.
- USDA Non-Streamlined Refinance — Similar to taking out a new mortgage, with a full appraisal, income review, and credit check.
These options make sense if your goal is to lower your monthly payment while staying within the USDA program. If you need more flexibility — such as cashing out equity, converting the home to a rental, or shortening your loan term — a conventional refinance is likely the better path.
The Refinancing Process
Refinancing a USDA loan into a conventional loan follows a process similar to taking out a new mortgage. The exact steps can vary by borrower and lender, but here’s what you can generally expect:
Step 1: Check If You’re Eligible to Refinance
Before starting the process, confirm that your loan is eligible. For some USDA refinance options — such as the Streamlined-Assist — you must wait at least 12 months after the loan was originated. For a conventional refinance, you’ll need to meet credit, equity, and income requirements set by your lender.
Step 2: Find a Lender
Not all lenders offer conventional refinancing for USDA loans, so it’s important to work with one who is experienced with both programs and understands the unique requirements involved — including holding periods and occupancy rules. Refi.com specializes in refinancing and can help you explore your options.
Step 3: Review and Negotiate Terms
The refinancing process will include a home appraisal and a review of your borrowing eligibility. Keep in mind that even if your home appraises at $400,000, the amount you can borrow may be lower depending on your LTV and lender guidelines.
Lenders do have some flexibility to work with you, so don’t hesitate to negotiate your interest rate, loan term, closing costs, and monthly payment before committing.
Step 4: Close
Once you’ve agreed on terms with your lender, you’ll close on your new loan. The refinance pays off your USDA loan, and you’ll have no further ties to the USDA program.
This opens up new flexibility — such as opening a HELOC, removing mortgage insurance if you have sufficient equity, or converting your home into a rental — subject to your new loan’s terms and lender approval.
The Bottom Line
Refinancing from a USDA loan to a conventional loan can be a smart move if you want to access your home’s equity, eliminate guarantee fees, shorten your loan term, or convert your property to a rental.
Ready to find out if it makes sense for you? Start your refinance application with Refi.com today and get guidance on the best path forward for your situation.
