Key takeaways
- A rate-and-term refinance swaps your current mortgage for one with a new rate, a new term, or both, without taking cash out.
- Lowering your rate can reduce your monthly payment and total interest.
- Moving to a shorter term builds equity faster; a longer term lowers your payment.
- Compare closing costs to your monthly savings to find your break-even point.
A rate-and-term refinance is a way to change your current mortgage without borrowing extra money. You replace your existing loan with a new one that has a different interest rate, a different repayment period, or both. Think of it as trading your old loan for one that fits your life today.
Reason #1: Lower your interest rate
If rates have dropped since you got your mortgage, or your credit has improved, you may qualify for a lower rate. That can reduce your monthly payment and save you money over the life of the loan.
Reason #2: Change your loan term
- Shorten your term: higher monthly payments, but you pay off your home sooner and pay much less interest overall.
- Extend your term: a lower monthly payment that frees up room in your budget.
Reason #3: Switch loan types or remove mortgage insurance
A refinance can move you from an adjustable-rate mortgage to a fixed rate for predictable payments, or from an FHA loan to a conventional loan to drop mortgage insurance once you have enough equity.
Rate-and-term vs. cash-out refinance
A rate-and-term refinance does not give you cash from your home's equity. If you want to access equity for renovations, debt payoff, or other goals, consider a cash-out refinance, a HELOC or second mortgage, or, for veterans, a VA cash-out refinance.
Is it worth it? Find your break-even point
Divide your total closing costs by your monthly savings. The result is the number of months it takes to break even. If you plan to stay in the home longer than that, the refinance may make sense.
What lenders look at
Expect a review of your income, credit history, debts, and your home's current value, often through a new appraisal.
Frequently asked questions
What is the difference between a rate-and-term refinance and a cash-out refinance?
A rate-and-term refinance changes your interest rate and/or loan term without taking cash out. A cash-out refinance replaces your loan with a larger one and pays you the difference in cash.
When does refinancing make sense?
Refinancing generally makes sense when the monthly savings recover your closing costs before you plan to sell or refinance again. Divide closing costs by monthly savings to find your break-even point in months.
Can I refinance to remove FHA mortgage insurance?
Often, yes. If you have enough equity (typically 20% or more), refinancing from an FHA loan into a conventional loan can eliminate mortgage insurance premiums.
Have questions about your situation?
Talk with a licensed loan originator. We'll walk you through your options in plain language.
Apply NowCall 855-724-5626This article is for general educational purposes and is not a commitment to lend. Loan programs, guidelines, and eligibility vary by lender and are subject to change. Contact us for advice on your specific situation.