Rate-and-Term Refinance

Refinance at variable rate and term, term, or both rate and term, of an existing mortgage without new down payment. It is also known as “cash refinancing”. This is different from cash refinancing, where new funds are advanced on the loan and borrowers receive cash at the end with their new loan. Interest rate and term refinances typically have lower interest rates than cash refinances.

KEY POINTS

* Interest rate and variable term refinancing on an existing mortgage or without new advances.

* Rate and term refinances typically occur in response to a drop in prevailing interest rates, while cash refinances are typically driven by increased home values.

* If your credit improves significantly, you can refinance at a lower interest rate.

Understanding Rates and Refinancing Term

Interest rate and term refinancing activity is primarily driven by lower market interest rates to reduce monthly mortgage payments. This can be contrasted with cash refinancing driven by home value appreciation as homeowners seek to tap into their own home equity.

Potential benefits of rate and term refinancing include guaranteed lower interest rates and more favorable terms on the mortgage; main balance remains unchanged. Such a refinance may reduce your monthly payments or may establish a new schedule to pay off your mortgage sooner. There are several ways to exercise rate and forward options.

Since there are pros and cons regarding both interest rates and terms of refinancing and cash refinancing, you should weigh the pros and cons of each before making your final decision.

Requirements for Rate and Term Refinancing

For interest rate and term refinancing to work, the borrower must have a lower interest rate. There are two main reasons why this might not be the case. The first is that interest rates in the overall economy can rise during adoption, making them more likely. This is one of many factors affecting interest rates that the borrower has no control over.

However, you do have some control over your consumer credit. If you've defaulted on your credit card or mortgage payments, you'll likely face higher interest rates. These individual factors are generally more important than market interest rates. On the other hand, if your credit has improved significantly, you can refinance at a lower interest rate.

Rate and Term Refinance versus other options

Cash refinance takes equity in your home for your use. This works best when the overall property value has increased due to the increase in property value. However, a cash refinance can also be done if you understand the mortgage well and have paid off a significant portion of its equity. A cash refinance will increase the principal amount owed on your mortgage.

This type of refinancing may require a home appraisal to assess its new value. You can look for such a refinance to access capital from the home's value, an amount you may not see until the home is sold. An opposite option known as a "cash refinance" involves putting more money into the mortgage to reduce the remaining principal.

When considering any of these options, it's important to carefully calculate all the impacts and see how they compare to maintaining your current mortgage.

Rate and Term Refinancing Examples

Suppose you have paid off a 30-year mortgage in 10 years and the interest rate suddenly drops; you may want to take advantage of the new rates. One option is to refinance the remaining balance on the original mortgage at this lower rate for a full 30-year additional term. The new loan will have a lower monthly payment, but it will be like starting over at a lower rate. This will add 10 years to the total time to pay off the mortgage. There's been 10 years to pay off the first mortgage, and there will be another 30 for the new mortgage, for a total of 40 years. Between lower interest rates and longer terms, monthly payments will be much lower.

You can also use the rate and term refinance option to pay new interest and negotiate a 15-year mortgage. Your monthly payment will be double over the 30-year term, all other things being equal. However, because of the lower interest rates, your monthly payments will likely be lower than what you'll pay over the remaining 20 years of the original mortgage.

However, there is a good chance that your monthly payments will be higher due to the shorter term. The main benefit is that you will save five years of payments. There's been 10 years to pay off the original mortgage, and there will be 15 years for the new mortgage, for a total of 25 years.