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A rate and term refinance is a new mortgage that improves your loan terms. With a lower interest rate or a new loan timeline, you may be able to save money, pay off your loan quicker, or make your monthly payment more affordable. A rate and term refinance is different from a cash-out refinance in that you won’t receive cash at closing.
Here’s what you need to know about rate and term refinances:
- How rate and term refinances work
- Rate and term refinance vs. cash-out refinance
- Rate and term refinance requirements
- Should you get a rate and term refinance?
How rate and term refinances work
When you refinance your mortgage, you get a new loan — with new terms — and pay off the original loan. A rate and term refinance, also known as a no cash-out refinance, allows you to change the interest rate and loan term without changing the principal balance.
Homeowners generally use a rate and term refinance to achieve one or more of these goals:
- Secure a lower mortgage rate. Check to see if you qualify for a lower refinance rate, which can help you reduce your monthly payment and save on interest costs.
- Change the loan term. When refinancing into a shorter loan term, you pay less interest over the life of the loan and get out of debt quicker — but your monthly payment will increase. Refinancing to a longer loan term, on the other hand, may increase your overall interest costs while lowering your monthly payments. This could help you avoid foreclosure if you’re struggling to pay your bills.
- Switch loan types. If you have an adjustable-rate mortgage and the initial rate period expires soon, you might decide to move to a fixed-rate loan. This can make payments more predictable.
Learn More: Refinancing to an ARM: What You Need to Know
Rate and term refinance vs. cash-out refinance
A rate and term refinance and a cash-out refinance both allow homeowners to take out a new mortgage and change the interest rate, loan term and loan type. But homeowners have an extra option with a cash-out refinance: tapping their home equity to borrow money.
With a cash-out refinance, the homeowner gets a new loan for more than they owe, pays off the original mortgage and pockets the difference. The extra money can go toward anything, such as debt consolidation or home improvement projects.
Check Out: How to Refinance Your Mortgage in 6 Easy Steps Just as when you applied for your original loan, you’ll need to meet your lender’s refinancing requirements. Fortunately, rate and term refinances are generally easier to qualify for than cash-out refinances because the equity requirements are less stringent. For a cash-out refinance, the homeowner would need enough equity to retain 20% after taking cash out. Here are the other general requirements for a rate and term refinance: When applying for a refinance, requirements vary by loan type. You’ll need at least: Generally, having more equity can help you get a better interest rate and potentially forgo private mortgage insurance (PMI). A conventional loan typically requires a credit score of at least 620, while you may qualify for an FHA refinance loan with a lower score. If your credit has improved since closing on the original mortgage, you might qualify for a better mortgage rate. Your debt-to-income ratio (DTI) measures how much of your monthly income goes toward debt payments. While there’s no set criteria for a refinance loan, lenders usually look for a DTI ratio of no more than 43% for conventional loans. If your earnings have increased, you might also consider shortening the loan term in the refinance — as long as you can afford the higher payments. Keep Reading: What Is a Mortgage Rate and How Do They Work? Rate and term refinancing is a good option for homeowners who are hoping to take advantage of lower interest rates and don’t need to borrow money at closing. According to mortgage data firm Black Knight, refinancing is a good idea if you can shave at least 0.75% off your original interest rate or lower your monthly payment. But it’s not just about how your monthly payment changes. The costs of refinancing a home typically reach $5,000, so you’ll have to calculate your break-even point. If you’re considering a rate and term refinance, be sure to compare offerings from different lenders to get the best possible deal. Credible can help you compare actual prequalified rates from all of our partner lenders, and it takes just minutes. Find My LoanRate and term refinance requirements
Adequate home equity
Strong credit
DTI ratio
Should you get a rate and term refinance?
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