A Guide to Rate-and-Term Refinance Loans

Benefits of a Rate-and-Term Refinance

You may benefit from a rate-and-term refinance if you reduce your interest rate, lower your monthly mortgage payment, change your mortgage loan term, or get a different loan type. Here’s a closer look at how rate-and-term refis could support eligible homeowners:

Get a Better Interest Rate

A rate-and-term refinance could allow you to get a lower interest rate for your mortgage. This may be the case if mortgage rates have dropped or if your credit has greatly improved, and you’re now eligible for a better rate. With a lower interest rate, you may end up paying less over the life of your loan and potentially get a lower monthly payment depending on the costs of the refinance, the difference between rates, the term of the new loan versus the old or how long you plan to be in the home.

Lower Your Monthly Mortgage Payment

Rate-and-term refis can potentially lower your monthly mortgage payment by:

• Reducing your interest rate (and therefore how much interest you pay each month)
• Extending your loan term so you have longer to pay off your loan balance. (By refinancing, your total finance charges may be higher over the life of the loan.)
• Removing private mortgage insurance (PMI) if you’ve built enough equity and met all other requirements

A smaller monthly payment could help you gain more flexibility in your budget. However, keep in mind that by refinancing, your total finance charges may be higher over the life of the loan.. There are also closing costs to consider when weighing those expenses against the potential refinance savings. 

Adjust Your Repayment Term

When you refinance with a rate-and-term refi, you can change your mortgage repayment term to be longer or shorter. For example: 

• Switching from a 15-year to 30-year fixed-rate loan: Lengthening your loan term from 15 years to 30 years could reduce your monthly payment and let you enjoy the benefits of more cash flow each month. With this option, you’re likely to end up paying more overall interest, but you get the flexibility of a lower mortgage payment each month.
• Switching from a 30-year to a 15-year fixed-rate loan: Shortening your loan term from 30 years to 15 years would allow you to pay off your mortgage faster and could  reduce how much you pay in interest.

To determine which loan term might be best for your goals, compare 15- versus 30-year mortgages. 

Get a Different Type of Loan

If you want to change the type of loan you have, you can do so with a rate-and-term refinance. So, in addition to potentially improved rates or terms, you could take advantage of other benefits that come with different mortgage types. For example, rate-and-term refis may be used to:

• Change from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage for more predictable fixed monthly payments.
• Change from a government-backed FHA loan to a conventional loan to remove mortgage insurance premiums.

How Does a Rate-and-Term Refinance Work?

With rate-and-term refis, you will pay closing costs but cannot take cash-out so your new loan balance could stay  the same as your existing mortgage loan balance depending on whether you pay the closing costs out of pocket or roll the costs into the new loan. Here’s what the process typically looks like to get a rate-and-term refinance:

1. Collect your financial information: Review factors such as your credit score, DTI, and current home equity to understand what lenders will consider when evaluating your application.
2. Compare loan options: Look over your loan options (conventional or VA, for example), including eligibility criteria, to figure out which option is right for you.
3. Submit your application: Apply with your lender and provide all required documentation, such as pay stubs, W-2s, and tax returns.
4. Close on the loan: If approved, you’ll move forward to closing, where you’ll sign new loan documents, pay closing costs when applicable, and begin making payments on your new loan.

The application process may vary based on the lender and your loan type. For a better understanding of what Freedom Mortgage has to offer, our loan advisors are always happy to answer any questions you may have.

How Long Does a Rate-and-Term Refinance Take?

A rate-and-term refinance typically takes about 30 to 45 days from application to closing, although the exact timeline can vary depending on your lender, finances, property, and loan requirements.

Delays can occur if your lender needs additional financial documents, the appraisal or title search takes longer than expected, or unexpected issues arise during underwriting. Responding promptly to your lender's requests and providing complete, accurate financial documentation can help keep the refinance process moving.

How Much Does a Rate-and-Term Refinance Cost?

Closing costs for a conventional rate-and-term refinance often range from around 2%–5% of the total loan amount. So, on a $275,000 loan balance, your closing costs could be between $5,500 and $13,750. The upfront costs can include mortgage discount points (prepaid interest) as well as loan origination, appraisal, title search, and credit report fees. Your lender, however, may allow you to roll some or all refinance costs into your loan balance so you won’t have to pay them in cash at loan closing.