Table of Contents
- What Is a Rate-and-Term Refinance?
- Understanding Rate-and-Term Refinance
- Requirements for Rate-and-Term Refinancing
- Rate-and-Term Refinancing vs. Other Options
- Examples of Rate-and-Term Refinancing
- What Is the Difference Between a Refinance and a Cash-out Refinance?
- What Are the Benefits of a Rate-and-Term Refinance?
- What Are the Risks of a Cash-out Refinance?
- The Bottom Line
What Is a Rate-and-Term Refinance?
Let me explain what a rate-and-term refinance is—it's a type of mortgage refinancing where you get a lower interest rate, a different loan term, or both, but you don't receive any cash upfront. That's why people call it a 'no cash-out refinance.'
On the other hand, a cash-out refinance lets you turn your home's equity into cash, which gets added to your new mortgage balance, and you get that money at closing. Rate-and-term options usually have lower interest rates compared to cash-out ones.
Key Takeaways
- A rate-and-term refinance replaces your mortgage with a new one that has a different rate or term, but no new money is advanced.
- This kind of refinancing often happens when mortgage rates drop, unlike cash-out refinances which are driven by rising home values.
- If your credit has improved a lot, you might qualify for a lower interest rate through refinancing.
Understanding Rate-and-Term Refinance
You see, rate-and-term refinancing picks up when market interest rates fall, mainly to cut down your monthly mortgage payments. Cash-out refinancing, though, ramps up when home values rise and you want to pull out equity.
The big plus here is getting a lower rate or better term while keeping the principal the same, which can lower your payments. You could also switch to a shorter term to pay off the loan faster—for instance, if you've paid 10 years on a 30-year mortgage, refinance to a 15-year term at a lower rate. Your payments might not drop much, but you'd finish sooner.
Remember, both rate-and-term and cash-out have pros and cons, so compare offers from lenders and think it through before deciding.
Requirements for Rate-and-Term Refinancing
For this to work, lower rates have to be available to you. But rates can rise during your application, which is out of your control.
You do control your credit, though—lenders check your history and score. If it's worse since your original loan, like from late payments, expect a higher rate. But if it's improved, you could get a better deal.
Your credit might matter more than overall rates. Also, note that cash-out refinances increase your loan amount and risk, often leading to higher rates and payments, raising foreclosure chances.
Rate-and-Term Refinancing vs. Other Options
Cash-out refinancing pulls equity out for cash, ideal when property values are up or you've paid down a lot. It boosts your principal and might need a new appraisal. You get cash you wouldn't otherwise until selling the home.
There's also cash-in refinancing, where you pay extra to cut the principal. Whatever you choose, calculate everything and compare to sticking with your current mortgage.
Examples of Rate-and-Term Refinancing
Suppose you've paid 10 years on a 30-year mortgage and rates drop—you could refinance the remaining balance to a new 30-year term at the lower rate. Payments would be lower, but you'd extend the total payoff time to 40 years overall.
Or, go for a 15-year term at the new rate. Payments might be higher due to the shorter term, but you'd save five years total, paying off in 25 years instead of 30. It's about balancing lower payments versus faster payoff.
Just a heads up: Mortgage discrimination is illegal based on race, religion, sex, and more. If you suspect it, report to the CFPB or HUD.
What Is the Difference Between a Refinance and a Cash-out Refinance?
A rate-and-term refinance swaps your mortgage for one with a better rate, keeping the balance similar. A cash-out one increases the balance by giving you cash from equity.
What Are the Benefits of a Rate-and-Term Refinance?
It lets you grab lower rates to cut payments or shorten the term to pay off quicker, without touching equity.
What Are the Risks of a Cash-out Refinance?
It raises your loan balance by reducing equity, so if income drops, you're at higher risk of default or foreclosure.
The Bottom Line
Rate-and-term refinancing typically means a lower rate and better term, keeping principal the same and often lowering payments. If you don't lower payments, you can pay off faster. But weigh the fees against savings to see if it's worth it.
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