Rate-and-Term Refinance

Rate-and-Term Refinance

A rate-and-term refinance replaces an existing mortgage with a new loan that changes the interest rate, the loan term, or both — without advancing any cash to the borrower. Because it does not increase the mortgage principal, it’s often called a “no cash-out refinance.” The goal is usually to lower monthly payments, reduce overall interest costs, or shorten the payoff period.

Key takeaways

• A rate-and-term refinance changes only the interest rate and/or term; it does not provide cash from home equity.
• Borrowers typically pursue it when market interest rates fall or when their credit has improved.
• Cash-out refinances differ by increasing the loan balance to provide cash; they generally carry higher rates and greater risk.

How it works

• You apply for a new mortgage to replace your current one. The new loan has a new interest rate and/or a different term (for example, switching from a 30-year to a 15-year loan).
• The principal balance remains the same (aside from standard closing credits/fees), so you’re not tapping equity for cash.
• Benefits include a lower interest rate, reduced monthly payments, or the ability to accelerate payoff by choosing a shorter term.

When a rate-and-term refinance makes sense

• Market mortgage rates drop significantly below your current rate.
• Your credit score or financial profile has improved since you took the original mortgage.
• You want to shorten the loan term to pay off the mortgage sooner and can afford higher monthly payments.
• After comparing lender offers, the interest savings exceed refinancing costs (closing fees, points, and other charges).

Requirements and limiting factors

• Availability of lower interest rates — rates can change during the application process.
• Lender underwriting that considers your current credit score, payment history, and debt levels; worse credit can mean higher refinance rates.
• You should factor in closing costs and calculate the break-even period (how long until savings exceed costs).

Rate-and-term vs. cash-out refinance

Rate-and-term:
* Does not increase the loan principal.
Typically offers lower interest rates than cash-out refinances.
Lowers monthly payments or shortens payoff without taking cash out.

Cash-out:
* Increases the loan balance to provide cash from home equity.
Often requires appraisal and lender approval for the higher balance.
Generally carries higher interest rates and increases the borrower’s risk of default or foreclosure if income drops.

Practical examples

• Refinance remaining balance on a 30-year mortgage after 10 years into a new 30‑year loan at a lower rate → monthly payments fall but total amortization resets (you effectively extend the remaining repayment period).
• Refinance the remaining balance into a 15‑year loan at a lower rate → monthly payments may rise versus a 30‑year but you’ll pay off the mortgage years earlier and save on interest.

Risks and considerations

• Refinancing resets or alters amortization; refinancing into the same or a longer term can extend the time you pay interest.
• Closing costs can offset short-term savings — calculate the break-even point.
• Cash-out refinances raise the loan balance and default risk; lenders typically charge higher rates for cash-out transactions.
• If you suspect mortgage lending discrimination, you can report concerns to federal agencies such as the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).

FAQs

Q: What’s the main difference between a rate-and-term refinance and a cash-out refinance?
A: Rate-and-term changes the loan’s rate/term without increasing principal. Cash-out increases the loan balance to give the borrower cash from home equity.

Q: What are the benefits of a rate-and-term refinance?
A: Lower monthly payments, lower interest rate, or the option to shorten the loan term and pay off the mortgage faster.

Q: What are the risks of a cash-out refinance?
A: Higher loan balance, higher rates, reduced equity, and increased risk of default or foreclosure if financial circumstances worsen.

Bottom line

A rate-and-term refinance is an effective tool to reduce interest costs, lower monthly payments, or accelerate mortgage payoff without tapping home equity. Compare offers from multiple lenders, account for closing costs, and ensure the projected savings justify refinancing before proceeding.