A rate-and-term refinance can help you lock in a better interest rate or a more favorable loan term.
Refinancing is a time-tested financial move that can lower your mortgage payments by securing a new loan with a lower interest rate or a different loan term. Just like with mortgages, there are various types of refinancing, so it’s important to pick the right one for your needs. For some homeowners, a rate-and-term refinance might be the best move.
This comprehensive guide will explore rate-and-term refinancing in finer detail, helping you understand when it makes sense and how to manage the process effectively.
- What is Rate-and-Term Refinancing?
- Pros
- Cons
- See All 8 Items
What is Rate-and-Term Refinancing?
“A rate-and-term refinance substitutes a preexisting home loan with a new home loan with a different interest rate or length of the home loan but with the same borrowed amount,” says Daniel Cabrera, owner of Sell My House Fast SA Texas.
Negotiating interest rates and loan terms is part of any refinancing process, such as a cash-out refinance. The difference is that those other types often result in a new and usually larger principal loan balance or push your loan term back to 30 years.
With a rate-and-term refinance, you can adjust only what you need to put yourself in good financial standing. You can adjust the interest rate and leave the loan term alone or vice versa. You can also change both at the same time if needed.
Pros
- “Can lower monthly payments if the interest rate is reduced,” Cabrera says.
- “Can shorten the loan term, saving thousands in interest over time,” Cabrera says.
- Lower interest rates than a cash-out refinance
- Fewer eligibility requirements than other refinancing types
Cons
- “Closing costs can be expensive, eliminating the savings,” Cabrera says.
- “Requires good credit and stable income to qualify for the best rates,” Cabrera says.
- “Extending the loan term may lower monthly payments but increase the total interest paid over time,” Cabrera says.
How Does Rate-and-Term Refinancing Work
In a rate-and-term refinance, you take out a new mortgage – often with a lower interest rate or a different loan term – that replaces your existing loan. The new loan pays off the old one, and you start making payments based on the new agreement. This arrangement doesn't change your principal amount but can significantly change your repayment schedule and interest expense.
Imagine you have a $300,000 mortgage at a 6.5% interest rate with a 30-year term, resulting in monthly payments of approximately $1,896. If rates drop and you refinance to a 4% interest rate with the same term, your new monthly payment could be around $1,432, saving you money each month. Alternatively, you could choose a 15-year term with higher monthly payments but a quicker payoff.
Obtaining a rate-and-term refinance is similar to obtaining an initial mortgage on your house. You’ll have to research refinance lenders, gather important financial documents (W-2s, paystubs, bank statements, etc.), fill out an application form, appraise your house and finalize the deal at closing.
As Cabrera points out, refinancing does come with closing costs. Some lenders may offer a no-closing cost refinance, which allows you to close the deal and pay closing-associated costs at another time.
What to Know About Rate-and-Term Refinancing
- A rate-and-term refinance replaces your existing mortgage with a new one featuring a different interest rate or loan term, potentially lowering your monthly payments or overall interest costs.
- To qualify for a rate-and-term refinance, you’ll typically need significant home equity (often at least 20%), a good credit score and a favorable debt-to-income ratio.
- Consider refinancing when interest rates drop, your financial situation improves or you want more predictable payments by switching from an adjustable to a fixed-rate mortgage.
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his coverage of the New York City economy. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with real estate investor Daniel Cabrera, owner of Sell My House Fast SA Texas.
Frequently Asked Questions
How does rate and term refinance work?
A rate-and-term refinance replaces your mortgage with a new one with a different interest rate or loan term. The principal loan balance remains unchanged, allowing the homeowner to lock in more favorable terms.
What is the waiting period for a rate and term refinance?
There is no legal waiting period for conventional loans before you can apply for a rate-and-term refinance, though some lenders may have their minimum waiting periods.
What is the difference between a rate and term refinance and a limited cash-out refinance?
A rate-and-term refinance changes your existing mortgage’s interest rate or loan term, thereby replacing the old one with more favorable terms. A limited cash-out refinance replaces your old mortgage with a new one, but you’re getting a lump-sum payment equal to the difference between the two mortgages.
Sources
- Daniel Cabrera, owner of Sell My House Fast SA Texas
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.