Rate-and-Term Refinance: When and How to Refinance

Refinancing your mortgage can be a smart financial move—especially when interest rates fall or your credit improves. Among the most popular options is the rate-and-term refinance, a strategy homeowners use to lower their interest rate, change the loan term, or switch loan types—without tapping into home equity.

In this guide, we’ll cover everything you need to know about rate-and-term refinancing: what it is, when to do it, how it works, and how to get started.

What Is Rate-and-Term Refinance?

A rate-and-term refinance replaces your existing mortgage with a new one that has a different interest rate, loan term, or both. The key distinction from a cash-out refinance is that you’re not withdrawing equity from your home—instead, you’re modifying your loan to potentially save money or better match your financial goals.

Key Features:

• No equity withdrawal involved
  
• New loan terms with potential savings
  
• Typically lower closing costs than cash-out options
  

When to Consider a Rate-and-Term Refinance

Refinancing is not always the right move. Here’s when it makes the most sense:

1. Interest Rates Have Dropped

If market rates have decreased since you took out your mortgage, refinancing could significantly reduce your monthly payment and total interest costs.

2. Your Credit Score Has Improved

A better credit score may qualify you for more favorable loan terms—even if rates haven’t dropped.

3. You Want to Change Your Loan Term

• Switch from a 30-year to a 15-year loan to pay off your mortgage faster
  
• Extend your term to reduce monthly payments, especially after a job change or financial shift
  

4. Switch Loan Types

Move from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage for greater stability.

How to Refinance: Step-by-Step

1. Check Your Current Mortgage Terms

Review your interest rate, remaining balance, and monthly payment to understand your baseline.

2. Evaluate Market Conditions

Use online mortgage calculators and tools to compare rates across lenders. Even a 0.5% reduction can lead to substantial long-term savings.

3. Estimate Closing Costs

Expect to pay 2% to 5% of the loan amount in refinancing fees. Make sure your savings justify the costs.

4. Apply with Multiple Lenders

Shop around and get prequalified to compare APRs, fees, and terms.

5. Lock Your Rate and Close

Once you find the best deal, lock your rate and finalize the paperwork. A typical refinance closes within 30 to 45 days.

Want to find out if refinancing is right for you? Talk to a mortgage expert today.

Pros and Cons of Rate-and-Term Refinancing

Pros:

• Lower monthly payments
  
• Reduced total interest paid
  
• More manageable or shorter loan terms
  
• Potential to drop mortgage insurance (PMI)
  

Cons:

• Upfront closing costs
  
• Resetting the loan term may increase long-term interest
  
• Break-even point may take several years
  

Curious how much you could save? Use our refinance calculator to estimate your monthly savings.

Rate-and-Term Refinance vs. Cash-Out Refinance

To learn more, read our full guide to cash-out refinancing.

Frequently Asked Questions (FAQ)

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• A Quick Mortgage: Your Path to Homeownership
• Mortgage Insurance Explained: Types and Considerations
  

Pro Tip: Always calculate your break-even point—the time it takes for your monthly savings to exceed your closing costs—before committing to a refinance.