Rate-and-term refinance
Updated
What is rate-and-term refinance?
A rate-and-term refinance changes your interest rate, your loan term, or both, without increasing the amount you borrow beyond closing costs. No cash goes to the borrower.
How it is calculated
New loan amount = current payoff balance + (closing costs, if financed)
Rate-and-term refinance questions
- What is a rate-and-term refinance?
- A refinance that changes the interest rate, the loan term, or both, without increasing what you owe. Nothing is paid out to the borrower beyond minor settlement adjustments, so the balance carries across essentially unchanged.
- What is the difference between a rate-and-term and a cash-out refinance?
- The balance. A rate-and-term refinance re-prices what you already owe; a cash-out refinance deliberately increases the balance so the difference can be paid to you. Lenders price the second higher because the loan-to-value ratio rises.
- Can closing costs be rolled into a rate-and-term refinance?
- Usually, and doing so keeps it a rate-and-term refinance rather than turning it into a cash-out one. The balance rises by the amount financed, which means paying interest on those fees for the whole term of the new loan.
What it means in practice
This is the standard form of refinancing. The new loan amount equals your current payoff balance, plus closing costs if you choose to finance them rather than pay them at closing.
Lenders generally price rate-and-term refinances better than cash-out refinances, because the loan-to-value ratio does not increase and the borrower is not extracting equity.
Extending the term lowers the monthly payment but restarts the amortization clock, which can increase total interest even at a lower rate.