Rate-and-Term Refinances: A Comprehensive Guide for Homeowners

Rate-and-Term Refinances

What is a Rate-and-Term Refinance?

Rate-and-term refinancing is a financial strategy where borrowers replace their existing mortgage with a new loan. 

This new loan typically offers different interest rates or terms but does not allow borrowers to receive cash back. 

This form of refinancing focuses solely on modifying the interest rate or the loan’s duration—or both.

Unlike a cash-out refinance, rate-and-term refinancing does not provide the borrower with additional cash upon closing. 

While a cash-out refinance increases the loan balance and allows the homeowner to access the home’s equity in cash, rate-and-term refinancing aims to optimize existing loan conditions without altering the loan amount.

Borrowers opt for rate-and-term refinancing for several reasons. The primary motivation is often to secure a lower interest rate, which can substantially decrease monthly mortgage payments and reduce the total interest paid over the life of the loan. 

Additionally, changing the loan term can adapt financial plans to new realities; for example, shifting from a 30-year to a 15-year mortgage can accelerate equity building and reduce long-term interest costs. 

Homeowners might also refinance to switch from an adjustable-rate mortgage to a fixed-rate mortgage, providing more predictable monthly payments and financial stability.

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Benefits of Rate-and-Term Refinancing

Reduced Monthly Mortgage Payments

One of the primary benefits of rate-and-term refinancing is the potential reduction in monthly mortgage payments. 

By securing a lower interest rate, homeowners can decrease the amount they pay each month. 

This reduction provides more disposable income and can alleviate financial stress, allowing homeowners to allocate funds to other expenses or savings.

Shortened Loan Terms

Refinancing can also allow borrowers to shorten their loan terms. For instance, converting from a 30-year to a 15-year mortgage not only speeds up the process of building equity but also reduces the total interest paid over the life of the loan. 

This strategic move can lead to significant long-term savings and a faster path to full homeownership.

Lower Interest Costs

Lowering the interest rate through refinancing reduces the overall interest cost of the loan. 

This benefit is particularly valuable over the long term, as even a slight reduction in the rate can result in considerable savings throughout the loan. 

Homeowners can use these savings to invest in other areas or pay down other debts.

More Predictable Costs with Fixed-Rate Mortgages

For homeowners with adjustable-rate mortgages (ARMs), rate-and-term refinancing can offer the security of a fixed-rate mortgage. 

This change eliminates the uncertainty of fluctuating interest rates, providing a consistent monthly payment that aids in budget planning and financial stability.

Adaptation to Financial Changes

Life circumstances and financial situations evolve, and refinancing can adjust a mortgage to better fit new realities. 

Whether it’s a change in income, family size, or long-term financial goals, rate-and-term refinancing provides an opportunity to align mortgage terms with current needs and future objectives.

Rate-and-term refinancing serves as a strategic tool for homeowners looking to reduce costs, gain equity faster, stabilize monthly payments, and adapt to financial changes. 

Each benefit contributes to greater financial health and peace of mind.

Eligibility and Requirements for Rate-and-Term Refinancing

Rate-and-term refinancing provides homeowners with the opportunity to adjust their mortgage terms to better suit their current financial situation. 

However, to qualify for such refinancing, borrowers must meet specific eligibility criteria and requirements set by lenders. 

Understanding these requirements is essential for a successful refinancing process.

Credit Score

A good credit score is fundamental for rate-and-term refinancing. It demonstrates to lenders that the borrower is a low-risk investment. 

Generally, a credit score of 620 or higher is necessary to qualify for most refinancing options. However, to secure the best interest rates, a score of 740 or above is often required. 

Borrowers should check their credit score and possibly take steps to improve it before applying for refinancing.

Debt-to-Income Ratio (DTI)

Lenders evaluate the debt-to-income ratio to ensure that borrowers can comfortably manage their monthly payments alongside their other financial obligations. 

Typically, a DTI ratio of 43% or lower is preferred. This ratio is calculated by dividing total monthly debt payments by gross monthly income. 

Maintaining a lower DTI can significantly enhance eligibility for rate-and-term refinancing.

Loan-to-Value Ratio (LTV)

The loan-to-value ratio is another critical factor considered by lenders. This ratio compares the current mortgage balance to the home’s market value. 

An LTV of 80% or lower is often required to qualify for refinancing without the need for private mortgage insurance (PMI). Homeowners may need to get a property appraisal to determine their current LTV.

Sufficient Equity

Having sufficient equity in the home is essential for rate-and-term refinancing. Equity is the portion of the property that the homeowner truly owns. 

If the market value of the home has increased or the mortgage balance has been significantly reduced, the equity might be substantial enough to meet lender requirements.

Consistent Employment and Income

Stable and consistent employment and income are vital for approval. Lenders require proof of income to verify that borrowers have the financial stability to meet the new loan terms. 

This is usually verified through recent pay stubs, tax returns, and employment verification.


The refinancing process involves extensive documentation, including recent pay stubs, tax returns, a credit report, statements of outstanding debts, and possibly more. 

Being prepared with all necessary documents can streamline the process and improve the chances of approval.

In conclusion, securing a rate-and-term refinance requires meeting specific eligibility criteria and providing comprehensive documentation. 

Homeowners considering this option should review their financial status against these requirements to assess their qualification prospects and prepare accordingly.

Speak to a Mortage Consultant From the Mortgage Shop

Do you need a refinance? Would you like to speak to a consultant about your mortgage refinance? Schedule a call with The Mortgage Shop today.