Rate-And-Term Refinance
A rate-and-term refinance changes the interest rate, the term—or both the rate and the term—of an existing mortgage without advancing any new money. It is also known as a “no cash-out refinance.”This differs from a cash-out refinance, in which new money is advanced on the loan and the borrower receives cash at the closing in addition to their new loan. Rate-and-term refinances often carry lower interest rates than cash-out refinances.
Definition: Rate and term refinancing refers to the process of changing the interest rate, term, or both of an existing mortgage without advancing any new funds. It is also known as “no cash-out refinancing.” This differs from cash-out refinancing, where new funds are advanced on the loan, and the borrower receives cash at closing in addition to their new loan. Compared to cash-out refinancing, rate and term refinancing typically has lower interest rates.
Origin: The concept of rate and term refinancing originated in the mid-20th century as financial markets developed and the mortgage market matured. Borrowers and lenders began seeking more flexible loan management options, especially during periods of significant interest rate fluctuations, to reduce repayment pressure by adjusting loan rates and terms.
Categories and Characteristics: Rate and term refinancing can be categorized into two main types:
- Rate Adjustment: Reducing the interest rate on an existing loan to lower monthly payments, suitable when market rates decrease.
- Term Adjustment: Extending or shortening the loan term to adjust monthly payments. Extending the term lowers monthly payments but increases total interest paid; shortening the term does the opposite.
Specific Cases:
- Case 1: Mr. Zhang took out a mortgage at a 5% interest rate five years ago. The current market rate has dropped to 3%. Through rate and term refinancing, he adjusts his loan rate to 3%, significantly reducing his monthly payments.
- Case 2: Ms. Li has 15 years left on her mortgage but wants to pay it off in 10 years. Through term adjustment refinancing, she shortens the loan term to 10 years. Although her monthly payments increase, the total interest paid decreases.
Common Questions:
- Question 1: Is rate and term refinancing always more cost-effective than cash-out refinancing?
Answer: Not necessarily. While rate and term refinancing typically has lower interest rates, its cost-effectiveness depends on the borrower's specific needs and market conditions. - Question 2: What fees are involved in the refinancing process?
Answer: Refinancing usually incurs appraisal fees, application fees, attorney fees, etc. Borrowers need to consider these costs comprehensively.
