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Rate-and-Term Refinance Loans
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A rate-and-term refinance lets you restructure your mortgage by changing the interest rate, repayment period, or both. Unlike a cash-out refinance, the goal is to restructure the mortgage rather than borrow against your home equity for cash.
Homeowners may consider rate-and-term refinancing when market conditions change, when they want a different repayment period, or when they want to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. But refinancing does not automatically save money. Closing costs, the new loan term, and how long you expect to keep the mortgage all matter.
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What Is a Rate-and-Term Refinance?
Homeowners typically refinance to change their interest rate, monthly mortgage payment, or to borrow money. For homeowners with an existing conventional mortgage, a home loan refinance can change the rate, term, or both.
Depending on the loan program, that might mean:
- Changing the interest rate
- Shortening or extending the repayment term
- Moving from an adjustable-rate to a fixed-rate mortgage
Fannie Mae classifies many rate-and-term refinance transactions as limited cash-out refinances. Under its guidelines, the new mortgage may pay off the existing first mortgage and eligible closing costs, with only limited cash back to the borrower.
Rate-and-Term Refinance vs. Cash-Out Refinance
The main difference between a rate-and-term and cash-out refinance is what the new mortgage is designed to accomplish.
A rate-and-term refinance focuses on restructuring the existing home loan. A cash-out refinance allows the borrower to take out a larger mortgage and receive a portion of the home’s equity as cash.
Feature
Main Goal
Rate-and-Term Refinance
Change rate, term, or loan structure.
Cash-Out Refinance
Access home equity as cash.
Feature
Cash to Borrower
Rate-and-Term Refinance
Not intended to provide cash out, although a small amount may be permitted at closing.
Cash-Out Refinance
Borrower receives eligible cash proceeds.
Feature
Common Uses
Rate-and-Term Refinance
Change the payment structure, shorten the term, or switch from an ARM to a fixed rate.
Cash-Out Refinance
Renovations, debt consolidation, or other expenses.
Feature
Loan Balance
Rate-and-Term Refinance
Based on refinancing existing mortgage and eligible costs.
Cash-Out Refinance
Includes additional equity being borrowed.
Feature
Key Consideration
Rate-and-Term Refinance
Do the new terms justify refinancing costs?
Cash-Out Refinance
Does accessing equity justify the larger mortgage?
Homeowners who want to access equity rather than simply restructure their mortgage can learn more about cash-out refinancing.
Why Do Homeowners Consider Rate-and-Term Refinancing?
Homeowners refinance for different reasons, so the numbers that matter most depend on what you want to accomplish.
A homeowner may explore a mortgage rate refinance after market conditions change. A different refinance mortgage rate could affect the monthly principal-and-interest payment and the total loan cost. However, the rate alone does not determine whether refinancing makes financial sense.
Some borrowers refinance to lower their mortgage payments. The savings may come from a lower interest rate, a longer loan term, or both. Extending the term can reduce the monthly payment, but it may mean making payments for more years and paying more overall.
Refinancing to a shorter loan term can help homeowners pay off their mortgage sooner. For example, a homeowner might replace a 30-year mortgage with a 15-year loan.
A shorter term may mean a higher monthly principal-and-interest payment, so homeowners should consider how the new payment fits their budget rather than focusing only on long-term savings.
An ARM-to-fixed-rate refinance replaces an adjustable-rate mortgage with a fixed-rate mortgage.
With an ARM, the interest rate can change based on the loan terms. A fixed-rate mortgage refinance may appeal to a homeowner who prefers a predictable principal-and-interest payment, even when switching loan types does not produce immediate savings.
Homeowners who have built equity can ask a loan officer whether refinancing could change the mortgage insurance required on the new loan. Eligibility depends on the loan program, property value, loan-to-value ratio, and other underwriting requirements.
How Closing Costs Affect a Refinance
Mortgage refinancing involves taking out a new loan, so the transaction typically comes with closing costs. Freddie Mac lists potential refinancing costs such as appraisal, credit report, title, origination, recording, and underwriting fees.
Even a refinance advertised as having no closing costs can involve a tradeoff. Lenders may cover upfront costs through a higher interest rate or by adding costs to the loan balance.
What Is the Refinance Break-Even Period?
The break-even period estimates how long it may take for monthly savings to offset the upfront costs of refinancing.
Refinance costs ÷ monthly savings = approximate break-even period.
Example
Refinance Costs
Amount
$4,500
Example
Estimated Monthly Savings
Amount
$150
Example
Break-Even Period
Amount
30 months
In this example, the homeowner would need 30 months of monthly savings to recover the $4,500 in refinance costs.
A homeowner planning to sell or refinance again within 30 months may view the costs differently from someone who expects to keep the new mortgage for many years.
Common Rate and Term Refinance Requirements
Specific rate-and-term refinance requirements vary by loan program, lender, property, and borrower.
Lenders may review:
- Credit history and credit score
- Income, assets, and employment documentation
- Current mortgage information
- Debt-to-income ratio
- Property value and available equity
- Loan-to-value ratio
- Payment history
- Property eligibility and occupancy
- Any applicable seasoning or waiting-period requirements
An appraisal may also be required to determine the home’s current value, although requirements vary by loan program and individual transaction.
Rate-and-term refinance rates also depend on the borrower, property, loan program, and market conditions. Rather than relying on a general advertised figure, borrowers can compare personalized loan estimates and the total costs associated with each option.
Look Beyond the Mortgage Rate
The lowest advertised rate is not necessarily the lowest-cost option for every borrower.
The CFPB recommends comparing how points and lender credits affect both upfront costs and the interest rate. Paying points means paying more at closing in exchange for a lower rate, while lender credits can reduce upfront costs in exchange for a higher rate.
Before refinancing your home loan, compare:
- Your current loan with the proposed new loan
- Estimated monthly principal-and-interest payments
- Remaining term versus the new repayment term
- Closing costs
- Estimated break-even period
- How long you expect to keep the mortgage
- Total borrowing costs over the period you expect to own the home
Looking at these numbers together gives you a more useful comparison than focusing on the rate alone.
Request a Personalized Refinance Analysis
A rate-and-term refinance can change your mortgage rate, repayment period, loan type, or payment structure, but the potential benefits depend on your individual circumstances.
Phast Funding can review your current mortgage, refinancing goals, estimated costs, and available loan options. Request a personalized refinance analysis to see which options may fit your home and financial goals.
FAQs
Can I refinance even if my current mortgage is relatively new?
Possibly. Some mortgages may be refinanced soon after closing, although eligibility requirements vary by loan program and transaction.
Does a rate-and-term refinance require an appraisal?
An appraisal may be required, but not for every refinance. Some borrowers may qualify for an appraisal waiver or another property valuation option, depending on the loan and lender requirements.
Can I refinance an ARM into a fixed-rate mortgage?
Yes, if eligible. Refinancing can replace an adjustable-rate mortgage with a fixed-rate loan that does not change over the loan term.
Will refinancing hurt my credit score?
Applying for a refinance requires a credit check, which can affect your credit score.
Do I have to refinance with my current mortgage company?
No. You can refinance with your current lender or a different one. Compare loan terms and costs before choosing a refinance home loan.
