What Is A Rate-And-Term Refinance?

Are interest rates lower now than when you originally got your mortgage loan? Maybe you want to change your term to lower your payment or pay off your loan faster. A rate-and-term refinance could be your key to both.

The Basics Of A Rate-And-Term Refinance

A rate-and-term refinance, sometimes called a rate-and-term option or a no cash-out refinance, allows you to change the terms of your current loan, replacing it with terms that are more favorable.

Refinancing means paying off your previous mortgage and making payments on a brand-new home loan. A rate-and-term refinance allows you to lower your payments, change your term or both with the goal of savings. For instance, taking a longer term means saving on monthly payments while shorter terms mean paying less interest on the loan.

The other common type of refinance, a cash-out refi, allows you to convert your home value to cash by taking on a bigger loan. With a rate-and-term refi, your mortgage balance isn’t touched.

Benefits Of A Rate-And-Term Refinance

Homeowners can take advantage of several benefits of a rate-and-term refinance. Let’s take a look at some of the most common reasons homeowners choose to take this step.

Lower Your Interest Rate

If current interest rates are lower than when you first got your loan, you may be able to get a lower one. You might also qualify for a lower interest rate if you have a better credit score or more equity now than when you got your original mortgage.

Because mortgages involve high loan amounts, even the difference of a few tenths of a percentage point in the rate can make a difference in the monthly payment and lifetime cost of the loan.

Reduce Your Monthly Mortgage Payment

You might choose a rate-and-term refi if you want lower monthly payments. This is often a pleasant side effect of a longer term or lower interest rate. Your monthly payment tends to go down when you refinance a mortgage to a longer term because you give yourself more time to pay off your loan while making more overall payments.

Refinancing to a longer term and reducing your monthly payment make your payment more manageable. Keep in mind that refinancing to reduce your mortgage payment could mean you’ll end up paying more in interest if you get there by lengthening your term.

Modify Your Term Length

You can also refinance your mortgage loan to a shorter term, such as refinancing to a 15-year mortgage from a 30-year mortgage. Doing so increases your monthly payment, but you end up paying much less in interest over the course of your loan. This can mean tens of thousands of dollars saved by the time your loan matures.

When it comes to conventional fixed-rate loans, you can customize your term to find one that works for you. Our YOURgage^® lets you pick from term options anywhere between 8 – 30 years.

Are you now earning more in income than when you got your loan? Refinancing to a shorter term can help you own your home sooner.

Change Your Loan Type

With a rate-and-term refinance, you might also be able to change the type of loan that you have. For example, you may be able to refinance an adjustable-rate mortgage (ARM) into a fixed-rate mortgage to provide more payment certainty. You might also switch from an FHA loan to a conventional mortgage to drop mortgage insurance.

How A Rate-And-Term Refinance Works

When you do a rate-and-term refinance, you’re replacing your existing mortgage with a different one. You’ll have a different rate and could end up with a shorter or longer term. These changes impact the amount of your monthly payment and the interest you pay over time.

Understanding Loan Replacement

To break this down, let's take a look at a couple of examples. In one, we’ll shorten the term, and one will be longer. Both of these payments don’t account for taxes and insurance, but they will give you an illustration of how replacing your own loan with a new one impacts your costs. You can put in your own numbers with our amortization calculator.

First, let’s take a look at a 15-year fixed term for a $350,000 loan with a 6.5% interest rate. The monthly payment is $3,049. If the loan is paid off according to the schedule, you would pay $198,798 in interest on top of the balance.

Now let’s take a look at a loan with the same balance, but a 30-year term. We’ll also change the interest rate to 7%. Interest rates for longer terms tend to be higher because investors need a higher yield to account for increased inflation over the life of the loan. You also pay more interest in general no matter the rate for a longer-term. 

The monthly payment on a $350,000 loan with a 30-year term at 7% is $2,329, a significant savings. But you pay $488,281 in total interest. 

Limited Equity Withdrawal

Although there are instances in which you may receive cash back at closing, never more than $2,000, the purpose of a rate-and-term refinance is never to convert your existing equity in the home into cash. It’s all about obtaining a better rate and/or a more manageable payment.

If you’re looking to put the equity in your home to productive use, possibly to consolidate debt or make home improvements, you’ll want to look into a cash-out refinance or home equity loan.

Rate-And-Term Refinance Requirements

When you refinance, you apply for a new loan. The criteria used by lenders should feel very similar to those used when you bought your home. 

Let’s take a look at some of the mortgage refinancing requirements to adjust your mortgage interest rate or term.

Credit Score

Refinances have minimum credit requirements that vary by loan type. Most lenders require a credit score of at least 620 to qualify for a refinance for a conventional loan.

Do you have an FHA loan? These types of loans have a median minimum qualifying score of 500, though most lenders set their own requirements. For example, Rocket Mortgage^® requires a minimum credit score of 580 for FHA loans. This enables us to offer you better loan terms based on a higher credit score. In fact, because your credit score is closely tie