A rate-and-term refinance replaces your existing mortgage with a new loan. The goal is usually to change the interest rate, repayment term or loan type without taking meaningful cash out of the home.
Homeowners often use this type of refinance to lower their monthly payment, pay off the loan faster, reduce total interest, move from an adjustable-rate mortgage to a fixed-rate loan or remove mortgage insurance when eligible.
A rate-and-term refinance is different from a cash-out refinance. A cash-out refinance lets you borrow more than you owe and take the difference in cash. A rate-and-term refinance is focused on changing the existing mortgage, not converting home equity into spending money.
| Rate-And-Term Refinance Basics |
What To Know |
| Main purpose |
Change the interest rate, loan term or loan structure on your mortgage. |
| Common goals |
Lower the monthly payment, shorten the term, reduce total interest, switch from an adjustable rate to a fixed rate or remove mortgage insurance when eligible. |
| Cash back |
Usually limited or none, depending on the loan program and investor rules. |
| Different from cash-out? |
Yes. A cash-out refinance is designed to let you access home equity as cash. |
| Key calculation |
Compare the refinance costs with your monthly savings, total interest savings and how long you plan to keep the loan. |
How A Rate-And-Term Refinance Works
A rate-and-term refinance pays off your current mortgage and replaces it with a new mortgage. The new loan may have a different interest rate, a different repayment term or a different loan type.
For example, you might refinance from a 30-year mortgage into a new 30-year mortgage with a lower rate. You might also refinance from a 30-year mortgage into a 15-year mortgage to pay the loan off faster, or refinance from an adjustable-rate mortgage into a fixed-rate mortgage for more predictable payments.
You may also use a refinance to remove mortgage insurance in some cases. For example, you may refinance to remove PMI on a conventional loan if you meet equity and loan requirements. Some borrowers also refinance an FHA loan to a conventional loan to remove FHA mortgage insurance premium, or MIP, when they qualify.
Rate-And-Term Refinance vs. Limited Cash-Out Refinance
“Rate-and-term refinance” is common borrower-facing language. In conforming conventional lending, similar transactions may be called limited cash-out refinances or no cash-out refinances, depending on the investor.
Fannie Mae uses the term limited cash-out refinance for transactions that can modify the interest rate and/or term, pay off the existing first mortgage, finance allowable costs and provide only limited cash back. Fannie Mae currently allows cash back up to the greater of 1% of the new refinance loan amount or $2,000 for standard limited cash-out refinance transactions.
Freddie Mac uses the term no cash-out refinance for mortgages where the proceeds may be used only for permitted purposes under its guide.
The exact terminology can vary by loan type, lender and investor. For borrowers, the main idea is the same: This type of refinance is meant to change the current mortgage, not pull out equity for unrelated expenses.
Rate-And-Term Refinance vs. Cash-Out Refinance
The difference between a rate-and-term refinance and a cash-out refinance comes down to the purpose of the new loan.
A rate-and-term refinance changes your mortgage terms. A cash-out refinance replaces your mortgage with a larger loan and lets you receive part of your equity as cash.
| Feature |
Rate-And-Term Refinance |
Cash-Out Refinance |
| Main goal |
Improve the rate, term or loan structure. |
Convert home equity into cash. |
| New loan amount |
Usually close to the existing mortgage balance, plus allowable costs. |
Larger than the existing mortgage balance. |
| Cash at closing |
Limited or none, depending on program rules. |
Yes, if the borrower qualifies. |
| Common uses |
Lower payment, shorter term, ARM-to-fixed refinance or mortgage insurance removal. |
Home improvements, debt payoff, major expenses or other cash needs. |
| Equity impact |
Usually preserves more equity. |
Reduces equity because the new loan balance is higher. |
Why Homeowners Use A Rate-And-Term Refinance
To Lower The Monthly Payment
A lower interest rate or longer loan term can reduce the monthly mortgage payment. This can help free up room in your monthly budget, but it may also increase total interest if you extend the repayment period.
To Pay Off The Mortgage Faster
Refinancing into a shorter term, such as moving from a 30-year mortgage to a 15-year mortgage, can help you pay off the loan faster. The monthly payment may increase, but the total interest paid over the life of the loan may be lower.
To Switch From An Adjustable Rate To A Fixed Rate
If you have an adjustable-rate mortgage, refinancing into a fixed-rate mortgage can make your payment more predictable. This may be useful if your adjustable rate is expected to rise or if you want a more stable long-term payment.
To Remove Mortgage Insurance
Some homeowners refinance to remove mortgage insurance. This may apply if your home value has increased, your loan balance has fallen or you are moving from an FHA loan with mortgage insurance premium to a conventional loan without private mortgage insurance. You still need to qualify under the new loan’s requirements.
To Change Loan Programs
A rate-and-term refinance can also be used to move from one loan type to another. For example, a borrower might refinance from an FHA loan to a conventional loan or from a conventional adjustable-rate mortgage to a fixed-rate mortgage.
How To Calculate Your Refinance Break-Even Point
A refinance usually comes with closing costs. A break-even calculation helps you estimate how long it will take for your monthly savings to cover those costs.
The basic formula is:
Refinance costs ÷ monthly savings = months to break even
For example, if your refinance costs $4,000 and lowers your monthly payment by $200, your simple break-even point is 20 months.
This calculation is useful, but it is not the only factor. You should also compare total interest, loan term, closing costs, whether costs are paid upfront or rolled into the loan and how long you expect to keep the mortgage.
You can use our break-even calculator to get an idea of what your timing could be.
Costs To Consider Before Refinancing
Refinancing can lower your payment or improve your loan structure, but it is not free. Common refinance costs may include:
- Application or lender fees.
- Origination fees.
- Appraisal fees.
- Credit report fees.
- Title search and title insurance.
- Recording fees.
- Prepaid interest, taxes or insurance.
- Discount points, if you choose to pay points for a lower rate.
Some borrowers roll closing costs into the new loan instead of paying them upfront. That can reduce out-of-pocket cost at closing, but it increases the loan balance and may increase total interest over time.
When A Rate-And-Term Refinance May Make Sense
A rate-and-term refinance may make sense when the new loan improves your financial position after accounting for costs.
It may be worth considering if:
- You can lower your rate enough to recover closing costs within a reasonable time.
- You plan to stay in the home long enough to benefit from the refinance.
- You can shorten the loan term without making the payment unaffordable.
- You want to move from an adjustable rate to a fixed rate.
- You can remove mortgage insurance and reduce the total monthly payment.
- The new loan better matches your long-term financial plan.
The refinance should still work when you look beyond the first monthly payment. A lower payment can be helpful, but extending the loan term may increase the total amount of interest paid.
When A Rate-And-Term Refinance May Not Make Sense
A rate-and-term refinance may not make sense if the closing costs are too high compared with the savings, or if you expect to sell the home before reaching the break-even point.
It may also be a poor fit if the new loan resets your repayment timeline in a way that increases total interest more than you are comfortable with. For example, refinancing from a mortgage with 20 years left into a new 30-year loan may lower the payment, but it can keep you in debt longer.
Before refinancing, compare the old loan and new loan side by side. Look at the monthly payment, total interest, closing costs, loan term and how long you expect to keep the mortgage.
How To Qualify For A Rate-And-Term Refinance
Qualification rules vary by loan type, lender and investor, but lenders commonly review the same core factors they consider for a purchase mortgage.
Credit Score
Your credit score can affect whether you qualify and what rate you receive. Stronger credit generally helps you qualify for better pricing, though minimum score requirements depend on the loan program.
Debt-To-Income Ratio
Your debt-to-income ratio compares your monthly debt payments with your gross monthly income. Lenders use it to evaluate whether the new mortgage payment fits your budget.
Home Equity
Your equity position matters because the lender will compare the new loan amount with the home’s value. This is called the loan-to-value ratio. More equity can make it easier to qualify and may help with mortgage insurance removal.
Income And Employment
Lenders typically verify income and employment to confirm you can repay the new mortgage. Documentation requirements vary depending on whether you are salaried, hourly, self-employed or have other income sources.
Property Value
Many refinances require a property valuation, such as an appraisal or an automated valuation method. The value helps determine your loan-to-value ratio and whether the refinance meets program requirements.
How To Compare Refinance Offers
When comparing refinance offers, do not focus only on the interest rate. Review the full loan estimate and compare:
- Interest rate.
- Annual percentage rate, or APR.
- Monthly principal and interest payment.
- Total estimated closing costs.
- Discount points.
- Loan term.
- Whether the rate is fixed or adjustable.
- Whether costs are paid upfront or rolled into the loan.
- Estimated break-even point.
A lower rate with higher closing costs may not be better if you do not keep the loan long enough to recover those costs. A slightly higher rate with lower upfront costs may make more sense for some borrowers.
The Bottom Line
A rate-and-term refinance replaces your current mortgage with a new loan to change the rate, term or loan structure. It can help lower your payment, shorten your payoff timeline, reduce total interest, remove mortgage insurance when eligible or move from an adjustable-rate loan to a fixed-rate loan.
The refinance only makes sense if the benefits outweigh the costs. Before applying, compare your current loan with the new loan, calculate your break-even point and consider how long you plan to stay in the home.
Frequently Asked Questions
What Is A Rate-And-Term Refinance?
A rate-and-term refinance replaces your current mortgage with a new mortgage to change the interest rate, loan term or loan structure. It is not primarily used to take cash out of the home.
Is A Rate-And-Term Refinance The Same As A Limited Cash-Out Refinance?
They are closely related, but the terminology depends on the loan program and investor. Fannie Mae uses the term limited cash-out refinance for certain conventional refinances that allow only limited cash back. Freddie Mac uses no cash-out refinance terminology for certain refinance transactions.
Can You Get Cash Back With A Rate-And-Term Refinance?
Possibly, but only within program limits. A rate-and-term refinance is not designed to provide meaningful cash back. If you want to borrow against your equity and receive cash at closing, a cash-out refinance is usually the relevant comparison.
What Is The Main Benefit Of A Rate-And-Term Refinance?
The main benefit is improving the existing mortgage. That may mean lowering the rate, lowering the payment, shortening the loan term, switching to a fixed rate or removing mortgage insurance when eligible.
When Does A Rate-And-Term Refinance Make Sense?
It may make sense when the new loan saves enough money, improves payment stability or better matches your long-term plan after accounting for closing costs and the time needed to break even.
Can A Rate-And-Term Refinance Remove PMI?
It can in some cases. If your home value has increased or your loan balance has fallen enough, refinancing into a new conventional loan may allow you to remove private mortgage insurance. You still need to meet the lender’s and loan program’s requirements.
Is A Rate-And-Term Refinance Better Than A Cash-Out Refinance?
It depends on your goal. A rate-and-term refinance is usually better if you want to change your mortgage without taking equity out. A cash-out refinance may be relevant if you need to access home equity as cash, but it increases the loan balance and reduces equity.
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