Rate-and-Term Refinance
A rate-and-term refinance replaces your current mortgage with a new loan that has a different interest rate, a different term, or both, without taking meaningful cash out. Homeowners use it to lower the payment, pay the loan off sooner, or switch between adjustable and fixed rates.
Key Takeaways
- You can change the rate, the term, the loan type, or all three, while the balance stays about the same.
- Shorter terms cut total interest but raise the payment. Longer terms do the reverse.
- Closing costs often run roughly 2% to 5% of the loan, so check the break-even point first.
- Rate-and-term refinances usually face fewer waiting requirements than cash-out refinances.
What is a rate-and-term refinance?
With a rate-and-term refinance, a new loan pays off your old one. The new loan is about the same size, apart from closing costs you choose to finance. You do not receive a meaningful amount of cash, though some programs allow a small amount back. Because the lender takes less risk than on a cash-out loan, pricing is usually better, and the seasoning rules are lighter. See when you can refinance.
What can I change with a rate-and-term refinance?
Lower the interest rate
If market rates have fallen, or your credit and equity have improved, you may qualify for a lower rate than the one you have. The saving depends on the size of the drop, your balance and your costs. Use the break-even calculator to test it.
Shorten the term
Many homeowners move from a 30-year loan to a 20- or 15-year loan. The rate on shorter terms is often lower, and you pay far less interest in total. The monthly payment goes up, so be sure it fits your budget.
Lengthen the term
Some people extend the term to lower a payment that has become hard to carry. This can help cash flow, but total interest usually rises and the payoff date moves out.
Switch between adjustable and fixed
If your adjustable-rate mortgage (ARM) is about to reset, a fixed rate makes your payment predictable. If you are in a fixed-rate loan and expect to move in a few years, an ARM with a long fixed period may offer a lower starting rate, with the risk that the rate can rise after the fixed period.
Change the loan type
You can move from FHA to conventional to drop FHA mortgage insurance once you have about 20% equity, or from conventional into VA if you are eligible. See conventional refinance options and VA refinance options.
Remove PMI
If your balance is at or below about 80% of your home’s value, a new conventional loan generally has no PMI. See the PMI guide.
How much can I save? A worked example
The lesson: a small rate drop with typical costs takes years to pay back, while a shorter term can save a lot of interest if you can afford the higher payment. For more math, see how much you will save by refinancing.
What does it cost, and who qualifies?
Costs include lender or broker fees, appraisal, title and escrow, recording, and any points. See the costs of refinancing. You can pay them, finance them (within loan-to-value limits), or take a higher rate in exchange for a lender credit.
Qualification looks at the same things as any mortgage:
- Credit: most conventional refinances start at 620. FHA and VA have their own minimums.
- Equity: more equity generally means better pricing, and 20% avoids PMI on conventional loans.
- Debt-to-income: commonly up to about 45% for conventional loans, and sometimes higher with strong factors.
- Property and occupancy: primary residences usually get the best terms. Second homes and investment properties have tighter limits.
- Appraisal: usually required, with exceptions for appraisal waivers and some streamline loans. See using a new appraisal.
When is rate-and-term not the right choice?
- You may sell before break-even.
- Your current rate is already very good compared with what is available.
- You need a large amount of cash. Look at cash-out refinance or a HELOC.
- You would reset a long term for a trivial payment cut.
For the conventional program page, see how to refinance a conventional loan. The full chapter starts at refinancing a home.
At Lendia, we help you pick the right term, not just the right rate
At Lendia, we compare rate-and-term options from multiple lenders, including different terms and points, and show you the monthly payment, break-even and total interest side by side. Contact us or get a rate quote now.
Frequently Asked Questions
What is the difference between rate-and-term and cash-out refinance?
Rate-and-term keeps the balance about the same and changes the rate or term. Cash-out increases the balance and pays you the difference.
Can I get a little cash back on a rate-and-term refinance?
Programs allow limited cash back, often small amounts or refunds of escrow. If the amount is more than a modest limit, the loan is treated as cash-out.
Is there a waiting period?
Generally less than for cash-out. Some programs, such as FHA and VA streamlines, require an existing loan and a payment record.
Should I choose a 15-year or 30-year term?
If you can comfortably afford the higher payment and keep an emergency fund, 15 years saves substantial interest. If not, 30 years with optional extra payments gives flexibility.
Can I include closing costs in the new loan?
Often yes, within the program’s loan-to-value limits. It raises the balance and payment slightly.
Rates and terms depend on your situation; approval requires qualification.
Talk to a Licensed Lendia California Loan Officer
At Lendia, we review your situation and show you the programs you qualify for.