What Is a Rate-and-Term Refinance?
A rate-and-term refinance is a mortgage loan refinancing option designed to secure a lower interest rate, shorten the loan term, or achieve both. This type of refinancing, often referred to as a ’no cash-out refinance,’ does not give money to the borrower upfront, unlike a cash-out refinance which taps into the home’s equity and increases the mortgage loan balance.
Key Takeaways
- New Loan with Better Terms: A rate-and-term refinance replaces an existing mortgage with a new loan with a more favorable interest rate or term without any additional cash.
- Optimal in Low-Rate Environments: This refinancing option is popular when mortgage rates drop, helping homeowners reduce their monthly payments.
- Credit Matters: Those with improved credit scores can often secure lower interest rates through this refinance option.
Understanding Rate-and-Term Refinance
Rate-and-term refinancing is largely driven by a decline in market interest rates, which can lower monthly mortgage payments. This is different from cash-out refinancing, which is driven by rising home values and a desire to tap into home equity. The main benefits of a rate-and-term refinance include securing a better interest rate and term, directly impacting the monthly payment amount.
For instance, homeowners could refinance their original 30-year mortgage into a new loan with a lower rate but only a 15-year term. This ensures faster payoff at possibly lower payments, thanks to the new interest rate.
Requirements for Rate-and-Term Refinancing
Successful rate-and-term refinancing relies heavily on the availability of lower interest rates. However, shifting market rates during the application process—or a decline in credit score or history—can negate the benefits. Predominantly, mortgage lenders will assess your creditworthiness before approving the refinance. Improved credit could lock in better rates, while detoriation in credit score could result in higher rates.
Rate-and-Term Refinancing vs. Other Options
Beyond rate-and-term refinancing, other mortgage adjustment options include cash-out refinancing. This taps into home equity and increases the principal owed, potentially requiring a home re-appraisal. Conversely, cash-in refinancing involves paying toward the mortgage, lowering the principal owed and helping secure better rates. Assessing these against your current mortgage implications ensures you choose the best refinancing route.
Examples of Rate-and-Term Refinancing
Imagine refinancing a 30-year mortgage, with 10 years paid, into another 30-year term at a lower rate – lower payments but effectively starting from zero, leading to 40 years in total payments. Choosing a 15-year term alternative saves five years of total payments, albeit with higher monthly payments due to the shorter term. This strategy often results in significant overall payment savings.
Conclusion
While rate-and-term refinancing can offer better rates and favorable loan terms, it is important to consider the associated costs and benefits thoroughly. If well-planned, it can lower monthly payments or lead to faster mortgage payoff, aligning seamlessly with financial goals.
Related Terms: mortgage, home equity, credit score, refinancing options.
References
- Consumer Financial Protection Bureau (CFPB). “CFPB Mortgage Report Finds Jumps in Closing Costs and Denials for Insufficient Income, Growing Proportion of Cash-Out Refinances”.
