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A Guide to Rate-and-Term Refinance

How You Could Save with a Rate-and-Term Refi

When you take out a mortgage, you agree to a set of terms, including an interest rate and timeline for paying back the loan. But what if, during that payback timeline, rates drop and you could save some money? Are you locked into your current loan? For some homeowners, a rate-and-term refi could be a smart financial decision.

Learn how this type of refi could help you save money over time, lower your monthly mortgage payment, or achieve another financial goal.

What Is a Rate-and-Term Refinance?

A rate-and-term refinance involves refinancing your current mortgage loan to secure different loan rates and terms. This isn’t the same as a cash-out refinance, because you can’t take out extra money based on your home’s equity. That’s why rate-and-term refis are sometimes referred to as no-cash-out refis.

Rate-and-Term Refinance vs. Cash Out Refinance

Both rate-and-term refinances and cash out refinances allow you to replace your current loan with a new one that has different rates or terms. Here’s where they differ:

Rate-and-Term Refi	Cash Out Refi
Often used to secure a lower interest rate, different loan term, or different loan type No cash back at closing Little to no change in home equity Typically has lower interest rates Can have more flexible eligibility requirements	Often used to tap into home equity for cash Provides a lump sum of money at closing Reduces available home equity Typically has slightly higher interest rates than a rate-and-term refi Often has stricter eligibility requirements

Keep in mind, a refinance may allow you to get a lower interest rate and a different loan term, so there are opportunities to access multiple benefits if you qualify.

Benefits of a Rate-and-Term Refinance

You may benefit from a rate-and-term refinance if you’re looking to lower your interest rate, lower your monthly mortgage payment, secure a different repayment term, or change your loan type. Here’s a closer look at how rate-and-term refis could support eligible homeowners:

Lower Your Interest Rate

A rate-and-term refinance could allow you to get a better interest rate for your mortgage. This may be the case if mortgage rates have dropped or if your credit has greatly improved and you’re eligible for a better rate than when you first applied. With a lower interest rate, you can end up paying less over the life of your loan.

Reduce Your Monthly Mortgage Payment

Rate-and-term refis can potentially lower your monthly mortgage payment by:

Reducing your interest rate and therefore how much you pay each month
Extending your loan term so you have more time to pay off your loan balance with a lower monthly payment
Removing mortgage insurance if you’ve built enough equity and meet all other requirements

A smaller monthly payment could help you gain more flexibility in your budget. However, keep in mind that you could end up paying more interest over the life of the loan if you extend your loan term.

Change Your Repayment Term

When you refinance with a rate-and-term refi, you can change your mortgage repayment term to be shorter or longer.

For example, you could shorten your loan term from 30 years to 15 years, paying off your mortgage faster and greatly reducing how much you pay in interest.

On the other hand, you could lengthen your loan term from 15 years to 30 years to reduce your monthly payment and let you enjoy the benefits of more cash flow each month. With this option, you’re likely to end up paying more overall interest, but you also get the freedom of a lower mortgage payment each month.

Adjust Your Loan Type

If you want to change the type of loan you have, you can do so with a rate-and-term refinance. Compare loan options and determine what features align best with your financial goals. For example, rate-and-term refis may be used to:

Change from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage for more predictable fixed monthly payments
Change from a government-backed FHA loan to a conventional loan to help get rid of mortgage insurance premiums

Rate-and-Term Refinance Eligibility

To qualify for a rate-and-term refinance, you must meet certain requirements when it comes to your credit, income, employment, debt-to-income (DTI) ratio, home equity, and mortgage payment history (depending on the loan option you refinance with):

Credit score: You must meet minimum credit score requirements to qualify for a refinance. It varies based on loan type, but in general, a higher credit score can boost your approval odds.
Income and employment: You must be able to demonstrate that you have a stable job or other source of income to afford the loan.
DTI: You must have a DTI that shows lenders you’re also comfortably able to afford your new payment. The maximum DTI percentage will vary based on how much you’re borrowing and the loan type.
Home equity: You’ll likely need to have a minimum amount of home equity, which could range from 10%–20%, to apply for a mortgage refinance.
Payment history: You are typically required to have a history of 12 consecutive months of on-time payments with your current mortgage.

Keep in mind: Requirements vary by lender and loan type. For example, government-backed loans like FHA loans and VA loans often have a bit more flexibility when it comes to credit scores and income.

How Does a Rate-and-Term Refinance Work?

Here’s what the process typically looks like to get a rate-and-term refinance:

Collect your financial information: Review information like your credit score, DTI, and current home equity to understand what lenders will look at when considering your application.
Compare loan options: Look over your loan options, including eligibility criteria, to figure out which option is right for you.
Submit your application: Apply with your lender and provide any required documentation, such as pay stubs, W-2s, and tax returns.
Close on the loan: If approved, you’ll move forward to closing, where you’ll sign new loan documents, pay closing costs when applicable, and begin making payments on your new loan.

The application process may vary based on the lender and your loan type. For a better understanding of what Freedom Mortgage has to offer, consider getting prequalified or speaking with a loan advisor.

Rate-and-Term Refinance FAQs

Looking for more information on rate-and-term refinances? Check out answers to these frequently asked questions:

Can You Get Cash Back with a Rate-and-Term Refinance?

No, you usually can’t get cash back with a rate-and-term refinance. If you’re interested in refinancing and getting money from your home’s equity, consider a cash out refinance.

How Much Does a Rate-and-Term Refinance Cost?

Closing costs for a conventional rate-and-term refinance often range from around 2%–6% of the total loan amount and can include loan origination, appraisal, title search, and credit report fees. Your lender, however, may allow you to roll some or all costs into your loan balance.

Can You Pay Off Debt with a Rate-and-Term Refinance?

Rate-and-term refinances aren’t intended to pay off debt, such as credit cards or personal loans. However, they can help you save money, establish a budget, or achieve other goals to better manage your debt.

Is a Rate-and-Term Refinance Right for You?

A rate-and-term refinance could be a good option if you’re looking to lower your interest rate or monthly mortgage payment, change your loan term, or get a different type of loan. Consider your financial goals and whether a rate-and-term refi aligns. For example, if you’re looking to refinance and fund home repairs, a cash out refi could be a better solution. Explore your options today and see how much you can save.