A rate and term refinance is an improvement on your current loan terms. You essentially exchange your old mortgage for a new one that leaves you more financially secure. You can negotiate this refinance to benefit from a lower interest rate or a new loan repayment timeline. This way, you can pay off your loan quickly, make your monthly payments more affordable, reduce your interest rate, build home equity, and save more money.
Here’s everything you need to know about rate and term refinances:
When to Choose Rate and Term Refinance
You get a new loan with new terms and pay off the old one when refinancing a mortgage. You can choose from different types of refinance loans, but if you don’t wish to change your principal balance, you should select a rate & term refinance.
Wondering if this is a good time to refinance? Here are some situations in which you can use a rate and term refinance:
Get a Lower Mortgage Rate
If you qualify for a lower refinance rate, which will help you reduce your monthly mortgage payments and save on interest.
Alter the Loan Term
When refinancing in a shorter loan term, you will have to pay less interest over the loan’s life, allowing you to get out of debt quickly. However, your monthly payment amount will increase. Refinancing to a longer term might increase your overall interest amount but lower your monthly payments. It will help you escape foreclosure if you are unable to make your payments. In both scenarios, a rate & term refinance will help you greatly.
Switch to a Different Loan
If you have an adjustable-rate mortgage and its initial interest rate period is expiring soon, you can decide to switch to a fixed-rate mortgage with this refinance plan. It will help you make your payments more predictable.
Remove Mortgage Insurance
If you have a conventional mortgage, you can stop paying private mortgage insurance (PMI) when you have at least 20% equity in your house. It might be a great idea to choose rate & term refinance when your house’s value has increased. You can refinance into a conventional loan if you have a USDA loan or an FHA loan and ample equity.
Improved Credit Score or More Financial Security
If you have a higher credit score than you had when closing your current loan, you can benefit from a lower mortgage rate. Similarly, if your earnings have increased and you’re more financially secure, you can shorten your loan term to pay off the mortgage more quickly.
When Your Breakeven Point Matches Your Plans
Assess the time it will take you to recoup the costs of a refinance closing and compare it with how long you plan on staying in your home. It will help you determine your refinance breakeven point. If this point falls within your plan, a refinance will make more sense than if your breakeven point falls outside the term you plan to stay in your current home.
Rate and Term Refinance Requirements
When choosing rate and term refinancing, you will have to meet the lender’s requirements. This type of refinancing is more accessible than cash-out refinances since the equity requirements are less severe.
The lender will also require adequate home equity, strong credit, satisfactory home appraisal, and a reliable debt-to-income ratio. Typically, you should have a minimum credit score of 620 and a loan-to-value ratio of 80% and less. Borrowers with a loan-to-value ratio of 65% or less usually get the best deals.
Benefits of Rate & Term Refinances
A rate and term refinance may help you:
Build Equity & Pay Off Your Mortgage Quickly
If you refinance to benefit from a shorter loan term, you can effectively accelerate your loan payoff timeline. For instance, moving to a 15-year plan from your previous 30-year plan will help you build equity swiftly and get out of debt sooner rather than later.
Lower Interest
Wondering how to get a better mortgage rate? Well, you can use a rate & term refinance plan to shorten your loan term, resulting in a lower interest rate on your mortgage. You can also choose a plan with a better interest rate based on your current financial condition and improved credit score.
Lower Your Monthly Payment
If you’re able to secure a lower interest rate, you can lower your monthly mortgage payments. Similarly, you can choose to extend your loan term with rate & term refinancing to make more room in your budget and keep yourself from experiencing foreclosure due to missed payments.
Make Monthly Payments More Expectable
With a rate & term refinancing plan, you can switch from an adjustable-rate mortgage to a fixed-rate loan to avoid the increase in interest rates and higher monthly payments. You can choose a loan with a lower interest rate and a repayment timeline that works best for you.
It Can Be Better than Cash-Out Refinance
Based on your needs, a rate and term refinance can be better than a cash-out refinance because it will not increase your debt. You will also benefit from changing your interest rate, loan type, and loan term. Rate & term refinancing will either maintain or reduce your current housing debt. Meanwhile, even though you will benefit from immediate cash with cash-out refinancing, it will require you to pay more debt down the line.
Things to Remember
While you will undoubtedly benefit greatly from a rate and term refinance, you might have to pay off your debt longer, pay the closing costs, and face increased monthly payments if you choose a shorter-term loan. So, you need to determine why you’re refinancing, i.e., whether you want reduced monthly payments, switch to a fixed rate, change your loan term, or get rid of mortgage insurance.
You should also check your financial standing, compare lenders, calculate your breakeven point, compare closing costs of different lenders, and then negotiate a rate and term refinance that works best for you. This new mortgage term will help you meet your goals.
Integrity Mortgage (NMLS #1692497) is ready to help you improve your mortgage terms and achieve your target with fixed-rate refinancing. Explore your refinance options with us today!
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