What is a rate-and-term refinance?

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If your credit score has improved or interest rates have dropped since you bought your home, a rate-and-term refinance may save you money. A rate-and-term refinance replaces your current mortgage with a new loan with new terms. If you can get a lower interest rate or extend your loan term, you can reduce your monthly payment.

Are you considering refinancing your mortgage? Keep reading to learn what a rate-and-term refinance is, how it works, and when it might be a good idea for you.

How does a rate-and-term refinance work?

A rate-and-term refinance uses the proceeds from a new home loan to pay off your existing mortgage.¹ You then make payments on the new loan.

The principal on a rate-and-term refinance matches your current loan balance. A rate-and-term refinance saves you money when your new loan has a lower mortgage interest rate, or you can extend your loan term to reduce your monthly payment. You also can refinance to a shorter term to pay off your loan more quickly and save money on overall interest.

In some cases, you can borrow a limited amount of cash with a rate-and-term refinance. Fannie Mae limits conventional loan rate-and-term borrowers to lending no more than 1% of their new loan up to $2,000 in cash. If you need to borrow more than that, a cash-out refinance may be a better option.

Rate-and-term refinance example

For example, let’s say you bought a $400,000 home, putting down $50,000 and taking out a conventional 30-year mortgage for $350,000 with a fixed interest rate of 7%. Your monthly payment for principal and interest is $2,329. After 3 years of payments, your mortgage balance is $338,544, and you've paid $72,372 in interest.

If you refinance that balance to a new 30-year fixed-rate loan at 6%, your new monthly payment is $2,030, saving you $299 a month. You'll pay a total of $392,163 in interest on this new loan. Add that to the interest paid on the first loan, and you pay $392,163 in total interest, saving you $23,746 over the $488,281 total interest payment on the original loan.

Benefits of a rate-and-term refinance

There are plenty of benefits to refinancing your home with a rate-and-term loan.

Reduce your interest rate

A key reason to pursue a rate-and-term refinance is to reduce your mortgage rate. If your credit has improved or mortgage rates are lower than when you bought your home, you may save money with a rate-and-term refinance. Even a slight reduction in your interest rate can significantly lower your overall loan cost.

Reduce your monthly mortgage payment

A rate-and-term refinance loan can help you get a lower mortgage payment, either by reducing your interest rate or extending your loan term.

For example, let’s say you have a $300,000 loan and 20 years of payments remaining. If you refinance to a 30-year loan, even if you don’t get a lower interest rate, you’ll reduce your monthly payment by spreading out your payments over 10 more years.

This benefit is desirable for borrowers with tight budgets or who would rather use the extra cash each month to fund other financial goals.

Modify your term length

Refinancing your mortgage allows you to shorten or extend your mortgage loan term. Shortening your loan term from 30 to 15 years lets you pay off your mortgage more quickly and save you money on interest.

Extending your loan term, on the other hand, can reduce your monthly payment, though you may pay more interest in the long term.

Change your loan type

With a rate-and-term refinance, you can switch to a different loan type altogether. For example, if you originally took out an adjustable-rate mortgage (ARM), you could refinance from an ARM to a fixed-rate loan.

Another option is to refinance from an FHA to a conventional loan, which could eliminate mortgage insurance.

Rate-and-term refinance requirements

There are several requirements to qualify for a rate-and-term refinance, which are similar to those you had to meet to get your original mortgage.

Here’s what your lender will look for:

• Credit score: You’ll typically need a credit score of at least 620 to refinance your home loan. Fannie Mae no longer requires a minimum credit score, but lenders can set their own. Requirements may be lower for government-backed loans. Additionally, FHA Streamline² and VA Streamline³ refinance loans don’t require a minimum credit score.
• Home equity: You may qualify for a conventional refinance with as little as 3% or 5% home equity, but you’ll be on the hook for private mortgage insurance (PMI). As a rule of thumb, it’s best to have at least 20% equity before you refinance.
• Debt-to-income ratio (DTI): Lenders consider your DTI when you refinance, which is the ratio of your monthly debt payments to your monthly gross income. You should aim for a DTI of no more than 43%, but some lenders allow up to 50%.
• Closing costs: While refinance closing costs vary by lender and location, expect to pay between 3% and 6% of your loan amount.
• Documentation: When you’re completing your refinance loan application, you’ll be asked to provide financial documents like your income tax returns, W-2s, pay stubs, income and employment history, and more.

When to consider a rate-and-term refinance

While a rate-and-term refinance has plenty of benefits, it's not the best answer for everyone. Here are some key situations where it makes the most sense.

You bought your home when interest rates were higher

If interest rates have dropped since you bought your home, refinancing to a lower rate can reduce your monthly payment and may save you money on overall interest. Just make sure you have a good credit score to qualify for the best rates available.

Your financial situation has improved

If your financial situation has changed since you originally bought your home, it might make sense to refinance. For example, if your credit score has improved, refinancing could help you land a better interest rate. On the other hand, if you need more room in your budget, refinancing can reduce your monthly payment and free up some cash flow.

The break-even point makes sense for your goals

The break-even point is the time it takes your savings from refinancing to recoup the cost of refinancing.

For example, let’s say you refinance and pay $10,000 in closing costs. If your new monthly payment saves you $250, it will take 40 months for your savings to exceed your costs. If you plan to own the home for more than three years, this refinance will save you money. If you were to sell or refinance the home again before reaching the break-even point, refinancing would cost you more than you’ll save.

If you aren’t sure whether refinancing is the right choice, consider using the Rocket Mortgage refinance calculator to see how much you could save.

How to get a rate-and-term refinance

Applying for a rate-and-term refinance is similar to applying for a mortgage to buy a home. Here are the steps you’ll go through and a peek into the refinancing underwriting process.

1. Assess your financial situation: Before you apply for a refinance, check your credit score and review your DTI to make sure you'll qualify.
2. Research and compare lenders: You can refinance through your current lender, but you don’t have to. Just as you did when you got your initial mortgage, make sure to shop around for the best interest rate.
3. Choose a lender: Complete an online application and provide financial information and documents to help your lender review your application.
4. Lock in your new rate: Many lenders offer a rate lock, which prevents your interest rate from going up once you've gotten your initial loan approval. You can often lock your rate for between 30 and 60 days, depending on your lender.
5. Get an appraisal: A home appraisal is necessary during the refinancing process to verify your home's value and ensure the lender is providing you with an appropriate loan amount. You may even find that your home value has increased, which could help you avoid PMI.
6. Review your Closing Disclosure: At least 3 business days before you close on your loan, your lender will provide a Closing Disclosure that outlines all your mortgage terms, including your interest rate, repayment term, monthly payments, and fees. Be sure to review this document carefully to make sure everything looks accurate.
7. Close on your new loan: The final step of the refinance process is to close on your loan. At the closing, you’ll pay your closing costs, sign your loan documents, and officially have your new loan.

Rate-and-term vs. cash-out refinance

A cash-out refinance works a lot like a rate-and-term refinance, except you use the current value of your home to borrow more than your current mortgage balance. After you pay off your current loan, you receive the difference in cash.

A cash-out refinance is a good option for someone who has some home equity and needs money to consolidate high-interest debts, pay for home improvements, make a large purchase, or boost their retirement savings.

A cash-out refinance is an option if you need to borrow cash and can get a lower interest rate on your loan. If a lower interest rate isn't possible, consider a home equity loan⁴ or home equity line of credit (HELOC). That way, you can keep the lower interest rate on your original mortgage while still accessing the equity you need.

Rocket Mortgage currently doesn't offer HELOCs.

FAQ

If you’re considering refinancing your home, here are a few more things to know to help you decide if it’s the right choice for you.

Is a rate-and-term refinance worth it?

A rate-and-term refinance can be worth it in many situations. It may be the right choice for you if you can qualify for a lower interest rate, the new loan helps further your financial goals, and you’re planning to own the home past the break-even point.

What is the waiting period for a rate-and-term refinance?

In some cases, there may be a waiting period before you can refinance, depending on your loan type. Some loan types have no waiting period, while others do. FHA loans, for example, require you to wait 6 months after buying a home to refinance.

How much does a rate-and-term refinance cost?

A rate-and-term refinance requires closing costs, which typically total 3% – 6% of the loan amount. The exact cost to refinance depends on your lender and loan type.

Can I refinance if I don’t have much equity?

While you may be able to refinance with as little as 3% – 5% home equity, most lenders prefer that you have at least 20% equity in your home. Keep in mind that if you refinance with less than 20% equity, you’ll have to continue paying PMI and could end up with a higher interest rate.

Does refinancing hurt my credit score?

Refinancing may temporarily reduce your credit score because it creates a new hard inquiry in your credit report, closes your old loan account, and opens a new loan account. But you should see your credit recover, and refinancing may even improve your credit score in the long run.

The bottom line: Is a rate-and-term refinance right for you?

A rate-and-term refinance is a popular tool for borrowers to save money on their mortgages and make sure their mortgage payment best fits their overall financial situation and goals.

If you’re considering refinancing your loan, make sure to review your current financial situation, look at the current market interest rates, and run the numbers to find out how long it would take for you to break even on the new loan.

If you’re ready to refinance, explore your borrowing options with Rocket Mortgage today to find out what interest rate you qualify for.

¹Refinancing may increase finance charges over the life of the loan.

²The FHA Streamline program may have stricter requirements in some states. In order to qualify for the FHA Streamline program, an immediate .5% minimum reduction in interest and mortgage insurance premium is required. Some states may require an appraisal.

³The VA Streamline program may have stricter requirements in some states. In order to qualify for the VA Streamline program, you must have a VA loan. The VA Streamline is only available on primary residences. Cash-out transactions are not allowed. In order to qualify for a VA Streamline, a 0.5% minimum reduction in interest rate on the previous fixed-rate loan must occur if the new loan will be a fixed rate or a 2% minimum reduction in interest rate on previous adjustable rate mortgage loan must occur; a minimum of 6 months of consecutive mortgage payments must be paid on the current loan at the time of application. Some states may require an appraisal. Additional restrictions/conditions may apply.

⁴Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 11/19/25 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Ameriprise products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher‑priced loans in the State of New York are subject to additional regulatory requirements. Additional restrictions apply. This is not a commitment to lend.

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