Rate-and-term refinance: What it is and how it works

Core Insights - The article discusses the concept of rate-and-term refinancing, which involves replacing an existing mortgage with a new loan that has a different interest rate and potentially different loan terms [1][2][3] Group 1: Rate-and-Term Refinance Overview - Rate-and-term refinance is a standard refinancing option based on the outstanding balance of the existing loan [2] - This type of refinance allows homeowners to secure a new mortgage rate and loan term, such as 15 or 30 years [3] - Rate-and-term refinancing does not involve tapping into home equity, unlike cash-out refinancing [5][21] Group 2: Benefits and Goals - The primary benefit of rate-and-term refinancing is the opportunity to lower monthly mortgage payments by securing a lower interest rate [9] - Homeowners can achieve various goals through this refinancing, such as building equity faster by shortening the loan term or eliminating private mortgage insurance (PMI) [14] - Rate-and-term refinancing is particularly advantageous when mortgage rates decline, allowing borrowers to reduce their monthly payments [7] Group 3: Costs and Breakeven Analysis - Closing costs for a rate-and-term refinance typically range from 2% to 5% of the loan amount, and these costs can often be rolled into the new mortgage [10][20] - The breakeven point is crucial for homeowners to determine how long it will take to recoup closing costs through savings on monthly payments [11][12] Group 4: Eligibility and Requirements - Most lenders require a minimum credit score of 620 for a rate-and-term refinance, with a preference for a debt-to-income ratio of 50% or less [17][18] - Homeowners are generally expected to have at least 20% equity in their home to qualify for this type of refinance [18][22] Group 5: Timing and Considerations - Homeowners should consider refinancing when mortgage rates drop below their current rate or when their financial situation improves [15][23] - It is advisable to avoid refinancing if planning to sell the home within a short timeframe, as the costs may outweigh the benefits [23]