Replace Your Current Mortgage with a New One Under More Favorable Terms

What is a

Rate and Term Refinance?

A rate and term refinance is a type of refinancing that allows you to change the terms of your current loan and replace them with more favorable ones. You get a new loan, pay off your old mortgage and then make payments toward your new loan when you refinance. A rate and term can give you more or less time to pay off your loan, a lower interest rate, or a different monthly payment.

Why Choose a

Rate and Term Refinance?

Extend or Shorten Payment Period

Renew Under More Favorable Interest Rates

Reduce Monthly Payments

Reasons to do a Rate and Term Refinance

Homeowners can take advantage of several benefits when they refinance. These include:

Lowering your rate: Are current interest rates lower than when you got your loan? You may be able to get a lower rate. You might also qualify for a lower interest rate if you have a better credit score or less debt now than when you took your original mortgage. Taking an interest rate even a fraction of a percentage lower can help you save thousands of dollars throughout your loan. This means that it’s often beneficial to refinance whenever you can get a lower interest rate than what you’re paying currently.

Reducing your payment: Your monthly payment goes down when you refinance a mortgage loan to a longer term. This is because you give yourself more time to repay your loan and make more overall payments. Remember that refinancing to reduce your payment means you’ll pay more in interest over time. Refinancing to a longer period and reducing your monthly payment can help you avoid foreclosure if you’re having trouble making your payments.

Changing your term length: You can also refinance your mortgage loan to a shorter term, such as refinancing to a 15-year mortgage from a 30-year mortgage. Doing so increases your monthly payment, but you pay less interest throughout your loan. This can mean thousands (or even tens of thousands) of dollars saved by the time your loan matures. Are you now earning more in income than when you got your loan? Refinancing to a shorter term can help you own your home sooner.

Changing your loan type: With a rate and term refinance, you might also be able to change your loan type. For example, you may be able to refinance an ARM mortgage into a fixed-rate mortgage or refinance an FHA to a conventional mortgage.


Rate And Term Refinance Requirements

Like when you applied for your initial loan, you’ll need to meet your lender’s standards before qualifying for a refinance. Let’s take a look at some of the mortgage refinancing requirements to refinance your mortgage loan’s rate or term:

Credit score: Refinances have minimum credit requirements that vary by loan type. You’ll need a credit score of at least 620 to qualify for a refinance for most loans. Do you have an FHA loan? If so, you may be able to refinance with a credit score as low as 580. You may want to consider a VA Streamline Refinance or FHA Streamline Refinance if your credit score is lower. These loan options allow you to refinance without a credit check.

Home equity: Your home equity is the percentage of the loan principal you’ve paid off. It’s possible to refinance with a lower equity percentage, but you won’t have access to the most favorable interest rates. It’s a good idea to wait to refinance until you have at least 20% equity in your home.

Debt-to-income ratio (DTI): Lenders also consider your debt-to-income (DTI) ratio when considering your refinance application. Aim for a DTI of 50% or lower before you apply.

Closing costs: You’ll need to account for closing costs when refinancing. Closing costs for a refinance usually equal around 2% – 6% of the principal balance on your loan. Can’t cover closing costs up front when you refinance? You may be able to roll them into your new loan with a no-closing-cost refinance if you have enough equity.


How To Get A Rate And Term Refinance

Applying for a refinance is similar to applying for a first mortgage loan. You’ll submit an application to your lender along with some financial documentation. Your lender will then schedule underwriting, an appraisal, and your closing meeting.

Have more questions about a Rate and Term Refinance?