What Is a Rate-and-Term Refinance?

Do you have a mortgage to pay off? Are you experiencing issues with making regular home loan payments? Borrowers can benefit from a rate and term as there have been certain changes since they’ve taken out the loan.

This option is called a rate and term refinance. It can be helpful as it allows you to return less in interest so that the monthly mortgage payments can be reduced. Are you ready to take advantage of this opportunity? We will talk more about how this option works and what benefits it provides.

rate and term refinance

Rate And Term Refinance: The Basics

What does this type of refinancing mean? If you compare the interest you are paying now on your home loan with the new rates, you may notice that you can save some money if you change the conditions of your present mortgage.

Hence, a rate and term refinance provides you with this possibility. The terms and interest rates of the current emergency loan can be reviewed and changed.

It means the new loan will have more affordable rates and manageable payments. Depending on the circumstances with rate and term, you can obtain less or more time to repay your mortgage.

Besides, borrowers can receive a different monthly payment and a lower interest rate. You obtain a new mortgage, repay your old home loan, and then make regular payments toward your new loan when you refinance. Some service providers refer to rate and term tools as widespread options.

How Does a Rate-and-Term Refinance Work?

This rate and term option can be called a no-cash-out refinance. The names of this method can be different, but the way it works is the same. If you don’t have enough money to cover the current mortgage payments, this option allows you to obtain a new home loan.

It will be perfect if you receive more attractive rates and favorable conditions to help you manage your payments. This new loan will help you repay existing debt. The interest can be changed, but the principal sum remains the same.

Borrowers may potentially save a lot of money if their income isn’t sufficient enough with rate and term option. This is one of the best ways to get a lower rate or a shorter loan term.

Requirements for Rate-and-Term Refinancing

When you applied for the mortgage, you had to meet particular demands and standards of the lender. Similarly, there are certain requirements for getting a rate and term refinancing option. Here are some of them:

  • Home equity. This is the percentage of the mortgage principal you have repaid. When you have 20% equity in your home or more, it’s worth refinancing the home loan. In another case, you won’t qualify for lower rates.
  • Credit score. The demands for a minimum credit rating are different. Every service provider can have various credit demands. Generally, borrowers should have a FICO score of 620 and higher to qualify for this crediting tool.
  • Debt-to-income ratio. This ratio is also taken into account. Try to have a DTI of 50% or lower before you apply.
  • Closing expenses. Closing costs can add about 2%-6% of the principal balance.

When to Consider A Rate-and-Term Refinance

If you have the following circumstances, you may consider getting this rate and term refinancing option:

  • When interest rates on your adjustable-rate home loan increase. Changing your adjustable-rate mortgage for a fixed-rate home loan can help you save on interest rates and lower the monthly payments.
  • When the market rate lowers or your credit rating boosts. If you improve your credit, you may qualify for a better rate and term and save money.
  • When your salary changes. If a borrower gets promoted or the salary changes, they may be eligible for a refinancing tool and repay the home loan sooner by making larger payments.
  • When you have 20% equity in your home, you can cancel private mortgage insurance for traditional home loans if you have 20% or more equity.

How to Get A Rate-and-Term Refinance

Data from the Mortgage Bankers Association showed that mortgage applications in the USA decreased to 7.7% in the week ended February 10th, 2023, while applications to refinance a mortgage increased 12.5%.

It is necessary to get through the process of getting this rate and term refinancing option carefully. We will help you with that. Generally, this process is similar to when you look for your first mortgage.

You must also make several steps to submit a request, get your financial documentation in order, and provide your personal finance information. At the same time, the lenders will review your data and make their lending decisions. The request for a home loan can be approved or denied. The same goes for rate and term refinance.

Applying for Your Refinance

The first step is to search for the best rate and term crediting tool. Every service provider and lending institution offers different options for the home loan. The conditions and terms may vary a lot.

You should closely examine the rates from numerous crediting companies before submitting a request. Once the creditor is chosen, submit the application and other supporting papers and documents.

You may be asked to present your W-2s, bank statements, or pay stubs. A great way is to look for suitable lenders in your area. Review their interest rate and terms for home loans.

Ensure your financial documents are in order before filling out the application. Self-employed borrowers might need to provide additional paperwork. To get a faster refinance, prepare all the papers in advance.

Locking in Your Interest Rate

A Loan Estimate is a document given to the borrower after submitting a rate and term refinance application. This paper gives the client an estimate of the costs and fees associated with the loan.

Please don’t throw it away; you must analyze it later with your Closing Disclosure. The mortgage rate can also be locked in.

As you may know, the interest in lending options changes frequently. Locking in your interest rates and terms can help protect the borrower from potential changes until closing. But it can be closed for a period of 30 to 60 days. Those who wish to lock it in for a longer term may be required to return an extra fee.

Getting a Home Appraisal

Creditors will typically schedule a home appraisal to define the present market value of the borrower’s property. This process is relevant for most refinance options and loans.

The home’s market value is based on the final selling prices of similar properties in the area and their condition. This is a necessary step.

Why are home appraisals so important? They assure the crediting company that they won’t issue more funds than your property is worth. The borrower can easily attend the appraisal.

Experts advise potential borrowers to present their homes in the best condition before the appraiser comes. If you opt for an FHS or VA loan, the appraisal demand may be skipped.

Reviewing and Understanding Your Closing Disclosure

Once the previous step is done, you will receive a Closing Disclosure paper. It includes significant information about the new lending options. The data concerning the monthly payment, the interest, and the principal will be mentioned in this document. You need to read it carefully and fully understand it.

This document should match up with the options included in the Loan Estimate you received at the beginning. If you agree with the terms and conditions, you can sign the paper.

Make certain the monthly payment for a rate and term refinance is lower than your present mortgage payment. Closing Disclosure finalizes the estimated closing costs mentioned in the loan estimate.

Closing On Your Loan

Once the underwriting is completed, the loan should be closed. The borrower has read the Closing Disclosure and agreed to the new loan options.

Once everything is set, you need to contact your service provider. State that you have received the Closing Disclosure and want to sign it. The closing meeting will be scheduled with the creditor.

You may ask additional questions during the closing meeting. The paperwork will finally be signed. Ensure you bring your Closing Disclosure, photo ID, and proof of transfer or check to cover closing expenses. A third party will be invited to perform the closing, and the refinance will be finalized.

Check Your Credit Before Applying

Borrowers need to meet minimum credit rating demands to qualify for a rate and term refinance. Every crediting company may have different requirements regarding credit scores.

If you take some time to check your rating before you apply, you may boost your chances of getting approved. Besides, it’s always good to know where your rating stands to understand your eligible options and whether it’s worth requesting a new lending tool right now.

Sometimes, it’s better to wait until your score improves. Three major credit reporting bureaus can offer a free copy of your credit report to check the score. Check the report for any errors or incorrect data and dispute the mistakes if you find any.

Pros and Cons of the Rate and Term Refinance Option

Every lending tool comes with benefits and downsides. Here is what you need to consider before you apply for this tool.


  • Save on interest: When you receive a lower interest, shorten the lending term or both, you may save on interest in the long run
  • Repay the home loan sooner: If you refinance into a shorter mortgage term, you may build equity faster and speed up the debt repayment process to become financially independent sooner
  • Lower your monthly payment: When you extend the loan term or secure a lower interest, you may get a lower monthly payment on your home loan.


  • Cost money in advance: Even if you save some cash on this lending tool, closing costs generally amount to $5,000
  • Extend the repayment timeline: The borrower can refinance into a longer period or to the same loan term.


This crediting option is worth it if you want to replace your present mortgage with a new home loan and change the interest for more affordable ones. Then you may pay less money for the loan over time.

Consumers with a credit rating of 620 and higher can qualify. Also, the debt-to-income ratio needs to be less than 50%. It’s wise to refinance your home loan when you have 20% equity in your home or more.

Generally, it takes 30 and 45 days from the day of your application. There is no exact time so you may ask your service provider about that.