Rate-and-Term Refinance

A rate-and-term refinance allows you to change your mortgage’s interest rate, loan term, or both without taking cash out of your home equity. You may refinance to reduce your interest rate or monthly payment, shorten your repayment period, or contribute funds at closing to lower the principal balance.

Unlike a cash-out refinance, the primary purpose is to improve the terms of your existing mortgage rather than receive equity in cash. It may be worth considering if your financial goals have changed, your credit has improved, or current market rates are more favorable. Savings are not guaranteed, so closing costs and the time needed to recover them should also be considered.

Overview

A rate-and-term refinance may help lower your interest rate or monthly mortgage payment. If you can manage a higher payment, refinancing into a shorter loan term may help you pay off your mortgage faster and reduce total interest costs.

You may consider a rate-and-term refinance if:

Interest rates have decreased since you obtained your mortgage.
You want to combine an eligible first mortgage and purchase-money second mortgage into one loan.
Your credit profile has improved, potentially helping you qualify for better terms.
Your home has increased in value and you want to eliminate private mortgage insurance (PMI).

Rate-and-Term Refinance FAQs

Can you pay off debt with a rate-and-term refinance?

A rate and term refinance can save you money on interest every month. This means you will have extra money available to pay off other debts. If you pay off higher interest debts first, you will save money long term. This type of loan, however, does not result in cash like a cash-out refinance does.

Is it smart to refinance twice in one year?

This all depends on your financial situation and the market. If interest rates drop significantly after your first refinance, it may be a good idea to refinance again. If you need to reduce your monthly payments and save money for other costs, it may be necessary to do another refinance. However you must consider a few negatives such as closing costs, short-term credit impact, and diminished equity building.

Should I refinance to a longer term?

If you refinance to a longer term, you will be able to lower your monthly payments. This is beneficial if you are looking to save money each month and need the extra cash to pay off other debts or provide financial flexibility. However, if you are able to afford your monthly payments, refinancing to a longer term will only cause you to pay more in interest rates over the life of the loan. In addition, it will cause you to slow down on your equity build-up.

How soon can you do a rate-and-term refinance?

This depends on the lender’s policies. Often a general waiting period is at least six months after you take out the original loan. It might be a good idea to wait longer since rate-and-term refinancing can involve closing costs which could off-set the savings you would get from a lower interest rate. You should consider your long-term financial goals and if a refinance aligns with them.