Definition
Rate-and-term refinance
A rate-and-term refinance replaces an existing mortgage with a new one to change the interest rate, the loan term or both, without taking meaningful cash out. Borrowers use it to lower the payment, shorten the term, switch from an adjustable to a fixed rate or remove mortgage insurance.
The new loan pays off the old balance, and closing costs are either paid in cash or added to the loan. Because no equity is being extracted, pricing and LTV limits are usually more favorable than for a cash-out refinance.
Worked example. A borrower owes $300,000 with 25 years left at 7.5%, paying about $2,217 a month in principal and interest. Refinancing into a new 25-year loan at an illustrative 6.5% drops the payment to about $2,026, a saving of roughly $191 a month. With $6,000 in closing costs, break-even arrives in about 31 months. If the borrower instead chooses a new 30-year term, the payment falls further to about $1,896, but five years are added to the repayment schedule and total interest may rise.
Other goals change the math. Moving from 30 to 15 years usually raises the payment while cutting total interest. Refinancing out of an FHA loan into a conventional one can eliminate MIP once LTV allows. Converting an ARM ahead of its first adjustment trades rate risk for certainty. The refinance calculator compares the old and new loans and reports the break-even month.
Calculators that use this term
FAQ · 2 questions
Questions about Rate-and-term refinance
How much does the rate need to drop to make refinancing worthwhile?
There is no fixed threshold. Divide the closing costs by the monthly saving to get the break-even point, then compare that with how long you expect to keep the loan.
Does a rate-and-term refinance reset my loan term?
Only if you choose a new full term. You can often pick a term that matches or is shorter than your remaining years, which avoids stretching the repayment.
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