Refinancing Into a Conventional Loan in Illinois: Is It Worth It?

Conventional Loan

Refinancing Into a Conventional Loan in Illinois: Is It Worth It?

Reviewed by the HomeMath editorial team Updated 2026-08-04

Key takeaways

Refinancing into a conventional loan allows you to remove private mortgage insurance (PMI) once your equity reaches 20% of the home's appraised value.
Illinois real estate transactions typically require an attorney to review contracts and represent your interests during the closing process.
A conventional refinance is most beneficial if you have a credit score of 720 or higher, as this qualifies you for the best interest rate tiers.
You must consider total closing costs, which generally range between 2% and 5% of the loan amount, to determine your break-even point.

Refinancing into a conventional loan involves replacing your existing mortgage—often an FHA or USDA loan—with a new loan that follows the guidelines set by Fannie Mae or Freddie Mac. Unlike government-backed loans, conventional loans are not insured by the federal government, which is why lenders rely on your credit score, debt-to-income (DTI) ratio, and the loan-to-value (LTV) ratio of your home to determine eligibility.

Why Refinance into a Conventional Loan?

The most common motivation for this transition is the removal of mortgage insurance. If you currently hold an FHA loan with less than 10% down, that mortgage insurance premium remains for the life of the loan. By refinancing into a conventional loan once your home has appreciated or you have paid down the principal to reach 20% equity, you can eliminate that monthly expense entirely.

Furthermore, conventional loans offer more flexibility regarding property types and investment properties. If your financial situation has improved since you first purchased your home, you may qualify for more favorable terms, including lower interest rates or a shorter loan term, such as moving from a 30-year to a 15-year mortgage to pay off the debt faster and reduce total interest paid.

The Illinois Closing Process

Unlike some states where title companies handle the entire closing, Illinois is traditionally an "attorney state." When you refinance, your attorney will review the loan documents, handle the title search, and coordinate with the lender to ensure all statutory requirements are met. Because attorneys in Illinois play a central role in real estate, you should budget for their fees as part of your total closing costs. While these costs vary, they are a mandatory component of the refinance process in this state.

The Break-Even Analysis

Before proceeding, calculate your break-even point. This is the amount of time it takes for the monthly savings from your new mortgage payment to cover the upfront costs of the refinance. If your closing costs total $5,000 and your new loan saves you $200 per month, it will take 25 months to break even. If you plan to sell your home or move within the next two years, the cost of refinancing may outweigh the benefits.

Lenders will also evaluate your DTI ratio, which compares your monthly debt payments to your gross monthly income. While specific requirements change based on market conditions, keeping your total DTI below 45% is generally a safe benchmark for conventional loan approval.

This information is for educational purposes and does not constitute financial or legal advice. Interest rates, closing costs, and credit requirements fluctuate based on market conditions and individual financial profiles. You should contact a licensed mortgage lender in Illinois to obtain a personalized loan estimate and confirm current eligibility requirements.

FAQ

Does Illinois have specific tax credits for refinancing?

Generally, no. While the Illinois Housing Development Authority (IHDA) offers programs for first-time homebuyers, these are typically focused on purchase loans rather than refinances. Refinancing is primarily a private transaction governed by federal mortgage guidelines.

What happens to my escrow account when I refinance?

When you pay off your old loan, your previous lender will issue a refund check for the balance remaining in your escrow account, usually within 30 days. You will then need to fund a new escrow account with your new lender as part of the closing costs for the conventional loan.

Can I refinance if my home value has dropped?

If your home value has dropped, you may be 'underwater' on your mortgage, meaning you owe more than the home is worth. In this scenario, a standard conventional refinance is difficult; you may need to look into federal programs like the Home Affordable Refinance Program (HARP) if you still qualify, though most of these programs have been replaced by newer lender-specific initiatives.

Does my credit score affect the cost of a conventional refinance?

Yes, significantly. Conventional loans use risk-based pricing, meaning borrowers with lower credit scores pay higher interest rates or 'loan-level price adjustments' (LLPAs). A higher credit score helps you secure a lower rate and potentially lower closing costs.

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