Rate-and-Term Refinance

What Is a Rate-and-Term Refinance?

A rate-and-term refinance is a type of mortgage refinance loan where homeowners replace their existing loan with a new one. The goal of this type of refinancing option is to modify the loan’s terms, such as the interest rate or repayment period, without withdrawing equity as cash.

A rate-and-term refi can help you secure a lower interest rate, adjust your loan term, or switch from an adjustable-rate to a fixed-rate mortgage. Unlike a cash-out refinance, you won’t receive any additional funds as part of the transaction.

Why Refinance Your Mortgage?

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

• Lower interest rates: Refinancing can lower your interest rate. If mortgage rates have dropped since you took out your original mortgage, refinancing could significantly reduce your monthly payments and long-term costs.
• 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 (for example, if you have 26 years left, start your new loan at a 26-year term with a lower rate), 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).

Rate-and-Term Refinance Requirements

Qualifying for a rate-and-term refinance involves meeting specific criteria, which vary depending on your loan type and financial history. Here are the general requirements to keep in mind when considering a rate-and-term refinance:

• Credit score: Conventional loans typically require a minimum credit score of 620. However, government-backed loans like FHA or VA loans may accept lower scores, making them accessible to more borrowers.
• Home equity: You generally need at least 15-20% equity in your home to qualify, ensuring you have a sufficient ownership stake to refinance.
• Debt-to-Income (DTI) ratio: Lenders typically require a DTI ratio below 43%, although some programs may allow higher ratios if you have compensating factors like a strong credit history or additional savings.
• Seasoning period: Most loans require a six-month “seasoning period” after the original mortgage before the borrower can refinance. 
• Loan terms: The new loan must meet lender and government guidelines, including property appraisal requirements, to confirm the home’s current value and eligibility.

Other Refinancing Options

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 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.

See If a Rate-and-Term Refi Could Save You Money

Refinancing your mortgage can be a game-changer for your finances, but it’s important to choose the right option for your needs. Understanding what a rate-and-term refinance is and how it works can help you make an excellent and informed choice if your goal is to secure a lower interest rate, adjust your loan term, or transition to a more stable loan type.

At Griffin Funding, we’re here to guide you through every step of the refinancing process. Whether you’re looking to secure a lower rate on your primary residence or refinance an investment property, we can help you explore your options. Not only do we have loan specialists ready to help you at every step along the way, but we also offer our Griffin Gold app that makes it easy to explore your options, calculate potential savings, and connect with our experienced loan specialists.

Let Griffin Funding help you turn your refinancing plans into reality. Reach out today to get started!