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Wishing you could make life a little easier by changing up your mortgage loan? A rate and term refinance is one option if you’re looking to score a lower monthly payment or cut down the amount of interest you’ll have to pay in the long run. It’s all about making your mortgage work for you, and the rate and term refinance route lets you update your mortgage rate or loan length to something more your style. Your brand-new loan will get used to pay off your existing one, and from there, you’ll start chipping away at that new mortgage.
Wondering why you’d go with a rate and term refinance? Let’s talk loan types. If you’ve got an adjustable-rate mortgage but you’re craving more predictability, a rate and term refinance can help you switch to a fixed-rate mortgage. Making that swap means your interest rate and monthly payments will stay the same—but let’s look at some of some the other top reasons to take advantage of this type of refinancing
If interest rates have dropped since you got the keys to your new home, a rate and term refinance could help you cash in on some serious savings. Locking in a new lower rate can help you save money over the life of your loan, which can be an attractive option depending on your situation.
If you’ve got lower monthly mortgage payments on your mind, stretching out your repayment term can help put some money back in your pocket in the short term. But just remember, the longer you spend paying off your loan, the more you’ll shell out in interest over time.
One rate and term refinance example could involve swapping your 30-year mortgage for a 15-year one. A shorter term means owning your home debt-free even sooner and could save you a bundle on interest over time. However, although you’ll build equity faster, you’ll have to deal with higher monthly payments.
Rate and term isn’t the only refinancing option on the block. A cash-out refinance is another go-to for homeowners, and one that might be a good fit for your finances.
| Rate & Term Refinance | Cash-Out Refinance | |
|---|---|---|
Purpose |
Adjusts either the interest rate, the loan term or both. No increase in loan principal. |
Replaces the current mortgage with a new one, based on home equity, and provides the difference in cash. |
Changes to Mortgage |
Can lower monthly payments, reduce interest rates or shorten the loan term. |
Provides cash for use (e.g., home improvements, debt payment), potentially with new loan terms and possibly a different interest rate or loan duration. |
Financial Impact |
None or very basic financial information. |
Detailed financial documents such as W-2 forms, tax returns, bank statements, etc. |
Loan Amount |
Remains the same or decreases if principal is paid down. |
Increases due to the additional cash taken out against the equity. |
Use of Funds |
No cash out. The focus is on bettering the terms of the existing loan. |
Cash received can be used for any purpose, such as renovations, debt consolidation, etc.. |
Risk Level |
Lower risk as it often aims to improve financial stability through better terms.. |
Higher risk due to increased loan amount and the potential for higher debt obligations. |
Now that you’ve got the basics down, let’s take a deeper dive into how they compare.
For starters, both replace the mortgage you have with a new one that comes with loan terms you’ll like better. The getting-started process is also pretty much the same. You’ll need to fill out an application, have your credit checked, get your home appraised and pay your closing costs.
Yes, you can refinance your mortgage to consolidate debt. This method involves taking out a new mortgage and using the extra funds to pay off other debts, such as credit card balances, student loans or medical bills.
This is often referred to as a debt consolidation refinance, which is similar to a cash-out refinance but with a few key differences:
Specific liabilities, as identified in your credit report, are marked to be paid off directly at closing using the cash proceeds from the new mortgage. This strategic payoff helps in reducing your debt-to-income ratio (DTI)
By lowering your DTI, this refinancing approach can help you qualify for a new loan—something you might not have been able to do before. A lower DTI not only reduces perceived risk from the lender’s perspective but might also qualify you for a loan program with more favourable terms and a lower interest rate.
The cash proceeds from the debt consolidation refinance are sent directly by the lender to your creditors, not to you. This ensures that debts are paid off efficiently and reduces the risk of funds being diverted to other uses.
If there are any remaining funds after your debts have been paid, these will be provided to you. This can offer some additional financial breathing room or be used for other important expenses.
This type of refinancing can be a smart strategy to manage and reduce your overall debt burden, streamline your finances and potentially improve your financial health over the long term.
Ready for the scoop on how to get your refinance moving? There are a few steps you’ll have to get through before you can take advantage of those brand-new terms.
Just like your first go-around, you’ll need an application under your belt. Your lender will need information on your income, credit and the details of your current mortgage, so have that close at hand.
Once your application gets the OK, you’ll have the chance to lock in your new interest rate. This is a big deal because it guarantees the rate you’ll get for your refinance.
Some lenders want an appraisal to double-check the market value of your home, so be prepared to build that into your schedule. They want to make sure that the home you’re looking to refinance is still worth what you say it is. This means they’ll take a close look at your home to make sure it’s in good shape. They’ll also check out what other homes in your neighbourhood have sold for to see if they match up.
You’re almost at the finish line, but before you close on your loan, you’ll need to go over your closing disclosures. These spell out your interest rates, monthly payments and closing costs. Give them a good read, and if something doesn’t add up, don’t hesitate to ask us.
The big finale: signing on the dotted line for your new loan and taking care of the closing costs.
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