What Is a Rate-and-Term Refinance?

Short answer

A rate-and-term refinance replaces your current mortgage with a new one of about the same balance to get a lower rate, a different term (for example 30 years to 15), a fixed rate instead of an adjustable one, or to remove FHA mortgage insurance. You take no cash beyond a small amount for rounding; closing costs can be paid in cash or added to the loan. The decision comes down to break-even: closing costs divided by monthly savings.

Definition

A rate-and-term (or 'no cash-out') refinance changes the interest rate, the loan term or the loan type without increasing the balance beyond the payoff plus closing costs. It is priced better than a cash-out refinance and allows higher LTVs.

Worked example

Current loan: $450,000 balance at 7.25%, principal and interest about $3,070. New loan: $450,000 at 6.25%, principal and interest about $2,771, saving $299 a month. Closing costs: Florida doc stamps $450,000 x 0.0035 = $1,575, intangible tax $450,000 x 0.002 = $900, title (lender's policy at reissue rate), appraisal and lender fees about $4,500, total about $6,975. Break-even = $6,975 / $299 = about 23 months. If you plan to keep the home longer than two years, the refinance pays. Over 10 years the savings are $299 x 120 = $35,880 minus $6,975 = $28,905. Illustration only; rates vary daily.

When a rate-and-term makes sense

• Rates have dropped enough that break-even lands well inside the time you will keep the home.
• You have an ARM about to adjust and want a fixed rate.
• You want to shorten to 15 or 20 years and can afford the higher payment.
• You have an FHA loan with MIP and now have 20% equity.
• You want to remove a co-borrower or an ex-spouse from the loan.

Rate-and-term vs streamline vs cash-out

A streamline refinance (FHA or VA IRRRL) is a simplified rate-and-term with less documentation and often no appraisal, but you stay in the same program. A cash-out refinance gives you money but costs more. A rate-and-term sits in the middle: full underwriting, best pricing, any program change. See refinance.

In South Florida

Florida's doc stamps and intangible tax make a refinance cost more here than in most states, which pushes the break-even out by several months. Two local offsets: Florida allows a doc stamp credit on a rate-and-term refinance for the unpaid balance of the existing mortgage with the same lender and borrower in some cases, and the title reissue rate is available if you provide your prior owner's policy; ask the title agent about both. Miami FHA borrowers with 20% equity from appreciation often refinance rate-and-term into a conventional loan to drop monthly MIP, which can save more than the rate change itself.