Rate-and-term regarding refinance loans

There are two major types of refinancing: rate and term, and cash out. This guide defines rate-and-term refinance loans and explains when they might be appropriate.

Rate-and-term loans involve paying the balance of your original mortgage with funds obtained from a new loan. The new loan features more desirable features than the original loan; in other words, it is designed to save you, the borrower, money.

As you probably surmised, rate-and-term refinance loans affect the interest rate and/or repayment terms of your original mortgage. During the process of getting such a refinance loan, a couple of things can happen. The first is that your interest rate could be lowered. To get a lower interest rate, generally one of two things has to happen: market interest rates lowered (most common), or your bad credit history has been repaired. Of course, for the latter to happen, you must have had bad credit in the first place. Hopefully, that was not the case!

The other thing that can happen during a rate-and-term refinance loan is a term adjustment. Depending on the borrower’s circumstances, the term might be extended or shortened. Borrowers extend loan terms in order to lessen monthly payments; they shorten loan terms to pay less interest and build more equity.

Rate-and-term refinance loans do not necessarily have to be the same mortgage type as the borrower’s original loan. For instance, you might begin with a balloon mortgage that has an initial term of five years. After those five years, you can reset the mortgage, which means the interest rate will adjust and you can carry on with the loan. Alternatively, you may choose to refinance with another type of loan altogether.