Key Takeaways
- Refinances mortgage without cash out.
- Lowers interest rate or changes loan term.
- Helps reduce payments or pay off faster.
What is Rate-and-Term Refinance?
A rate-and-term refinance replaces your existing mortgage with a new loan featuring a different interest rate, loan term, or both, without withdrawing equity for cash. This strategy aims to reduce monthly payments, lower total interest costs, or shorten the loan duration.
It is distinct from cash-out refinancing because it does not increase your loan balance beyond closing costs, preserving your home equity while adjusting financial terms to suit your needs.
Key Characteristics
Rate-and-term refinances focus on improving loan terms without accessing home equity. Key features include:
- Interest rate adjustment: Secure a lower rate to reduce monthly payments and lifetime interest, enhancing your back-end ratio and overall affordability.
- Loan term modification: Change the duration—extend to lower payments or shorten to pay off faster and build equity sooner.
- No cash-out: Does not provide cash from your home's equity, maintaining your investment in the property.
- Eligibility requirements: Typically requires a credit score improvement, a debt-to-income ratio within lender guidelines, and sufficient equity often at or below 80% loan-to-value.
How It Works
To start a rate-and-term refinance, you apply with your lender by submitting financial documents for underwriting, similar to your original mortgage process. An appraisal may be required to confirm your home’s value supports the loan amount.
The new mortgage pays off your existing loan, with principal roughly equal to the current balance plus closing costs, which you can pay upfront or roll into the loan. This refinancing can be especially beneficial when market rates drop or your credit profile improves.
Examples and Use Cases
Here are common scenarios where a rate-and-term refinance might be advantageous:
- Lowering payments: After five years on a 30-year mortgage, refinancing at a lower rate reduces monthly costs and total interest paid.
- Shortening loan term: Changing from a 30-year to a 15-year term to build equity faster, even if monthly payments increase.
- Switching loan types: Converting an adjustable-rate mortgage to a fixed-rate loan for stability and predictability.
- Investment strategy: Investors comparing options like low-cost index funds may also consider how refinancing affects their overall Apple or Delta holdings.
Important Considerations
Refinancing involves upfront costs typically ranging from 2% to 5% of the loan amount, so calculate your break-even point to ensure the savings outweigh expenses. It’s wise to evaluate the impact on your earnest money commitments and consider current labor market conditions affecting your financial stability.
Consult with lenders about your specific situation to understand eligibility and how a rate-and-term refinance fits your financial goals. This approach is most effective when rates fall at least half a percentage point below your current mortgage rate or if you plan to stay in your home long enough to recoup closing costs.
Final Words
A rate-and-term refinance can significantly lower your interest costs or monthly payments without tapping into your home equity. To see if it makes sense for you, compare current rates and loan terms with your existing mortgage and calculate potential savings before proceeding.
Frequently Asked Questions
A rate-and-term refinance replaces your existing mortgage with a new one that has a different interest rate, loan term, or both, without taking cash out from your home's equity. It’s designed to lower monthly payments, reduce total interest, or pay off your loan faster.
By securing a lower interest rate or extending your loan term, a rate-and-term refinance can reduce your monthly mortgage payments. For example, refinancing from a 6% to a 4% interest rate on your remaining balance can save you significant money each month.
Yes, you can shorten your loan term through a rate-and-term refinance, which lets you pay off your mortgage faster. While this may increase your monthly payments, it can save you thousands in interest over the life of the loan.
A rate-and-term refinance changes your mortgage rate or term without taking cash out of your home equity, preserving your equity buildup. In contrast, a cash-out refinance lets you withdraw equity as cash but usually comes with higher interest rates and larger loan amounts.
To qualify, lenders typically look for improved credit scores, a lower debt-to-income ratio, and sufficient home equity—usually at least 20-25%. An appraisal is also required to confirm your home's value supports the loan amount.
The process is similar to your original mortgage: submitting an application and financial documents, undergoing underwriting and appraisal, and closing the loan. The new mortgage pays off the old one, with closing costs paid upfront or sometimes rolled into the loan.
Yes, a rate-and-term refinance can be used to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. This provides payment stability, especially if your ARM is approaching a rate reset.
It’s beneficial when market interest rates drop, your credit improves, or your financial situation changes, allowing you to save money by reducing payments or paying off your loan faster without tapping into your home equity.
