Rate-and-Term Refinance

There are a few compelling reasons to consider using a rate-and-term refinance:

• Lower interest rates: Refinancing can potentially lower your interest rate. If mortgage rates have dropped since you took out your original mortgage, refinancing could potentially significantly reduce your monthly payments and long-term costs. However, refinancing to reduce your monthly payment may result in a longer loan term and a higher total finance charge over the life of the loan. 
• Improved financial profile: If you have achieved a better credit score or lower debt-to-income (DTI) ratio since you first took out your mortgage, you may be able to qualify you for more favorable rates and terms by refinancing.
• Refinancing from an ARM: You can refinance an ARM loan to a fixed-rate loan that provides stability and predictable payments. 
• Adjust loan terms: This is a great option to extend your loan term to reduce monthly payments or shorten it to pay off your loan faster. Go from a 30-year to a 15-year term to pay off the home quicker, refinance to the same term, or go back to a 30-year term to lower the payments even more.  
• Eliminate PMI: If your home equity has reached 20% or more on a conventional loan, refinancing allows you to drop private mortgage insurance (PMI).

While a rate-and-term refinance is a great choice for many homeowners, it’s not the only option available. Depending on your financial goals, you may want to explore these alternatives:

• Cash-out refinance: A cash-out refinance allows you to tap into your home’s equity and receive cash at closing. This can be a good option if you need funds for home improvements, debt consolidation, or other large expenses. 
• Home equity loan: A home equity loan isn’t technically a refinance, but it allows you to borrow against your home’s equity while keeping your current mortgage intact. This can be useful if you don’t want to modify your existing loan. Read our blog on the differences between a second mortgage and refinancing to further compare these options. 
• Government-backed refinancing programs: If you have a government-backed loan, you may qualify for specialized refinancing options, including:
  • VA Streamline Refinance: Designed for veterans and active-duty military, this option simplifies the refinancing process and can reduce the costs involved with refinancing.
  • FHA Streamline Refinance: A quick and efficient option for current FHA borrowers to potentially lower their interest rates.
  • USDA Streamline Refinance: Available to USDA loan holders, this option helps reduce rates but does not include a cash-out option.

Yes, you can refinance and keep the same interest rate. While many borrowers pursue a rate-and-term refinance to secure a lower rate, you may be satisfied with your rate and instead be interested in other objectives such as: 

• Switching from an ARM to a fixed-rate mortgage 
• Eliminating PMI 
• Adding or removing a borrower 
• Extending your loan term to reduce monthly payments 
• Shortening your loan term to accelerate the repayment timeline

Yes, fixed-rate mortgages can be refinanced. Homeowners often refinance their fixed-rate mortgage to obtain a lower interest rate, adjust their loan term, or remove PMI once they achieve 20% equity. 

This depends on what you want as a borrower. You can refinance into a new 30-year mortgage and reset your loan term, but you can also shorten your loan term or refinance to the same term. For example, if you have 26 years left on your mortgage, you can refinance to a new 26-year term with a lower rate. 

Rate-and-term refinances allow homeowners to secure a new interest rate or different loan terms. A cash-out refinance replaces a borrower’s mortgage with a larger one, allowing the homeowner to keep the difference as cash. 

With a cash-out refinance, you essentially convert some of your home equity for cash. By taking out a larger loan amount, you also increase your loan balance, whereas with a rate-and-term refinance your loan balance remains the same.