You’re thinking about refinancing but looking at all the options can be a little overwhelming. We get it. Making sure it’s the right time, that the savings will be worth it and that you choose the right type of refinance are important things to consider. We’re here to help you sort through all the details. Let’s talk about one of the most common refi, the rate-and-term refinance.
What is a rate-and-term refinance?
A rate-and-term refinance lets you change the term (which includes the length of your loan and payment amount) or interest of your loan or both. This gives you options to lower your rate, bring in cash to lower your principal loan balance or pay off your loan faster.
You might want to explore options for a rate-and-term refinance for a variety of reasons.
Rates have dropped and you want to take advantage of lower interest payments.
Consolidating a first and purchase money second could save you monthly.
You may want to lower your mortgage term to pay off your mortgage faster and pay less interest for the life of the loan.
Your credit score has increased since you first purchased your home allowing you to secure a better interest rate.
You want to eliminate private mortgage insurance (PMI) and the value of your home has increased to no longer require it.
A rate-and-term refinance provides a great option if you’re wanting to lower your interest rate, lower the amount of your loan to save on monthly payments or pay off your loan faster.
For more information, check out these resources on the refinance process, how rate and term refinances work and refinance interest rates.
How does a rate-and-term-refinance work?
Let’s talk about how this works. Refinances always involve taking out a new loan, typically with better terms, in order to pay off an existing loan. A rate-and-term refinance does the opposite of a cash-out refinance? Here’s more information on how a cash-out refinance works.
A rate-and-term refinance allows you to potentially get a lower rate or change the term of your loan without taking any cash out of the loan. For example, if you’ve been making mortgage payments on a 30-year loan for five years and rates drop, you might want to take advantage of lower interest rates. A rate-and-term refinance would help you refinance loan with new terms.
We always start with a conversation about your unique financial situation including the funds you’re bringing in, and the best options for the new interest rate, and the term of the new loan (15-year, 20-year, 30-year, etc.). We’ll review your current loan including items like your current interest rate, what you owe on the mortgage, the appraised value of your home and the amount of home equity you have.
It’s important to look at your break-even point, which is how long it’ll take for the amount you will save from refinancing to outweigh the cost of the loan. It’s a quick equation that looks at all the variables of your situation. You’ll want to know how many months it will take for the cost of refinancing to be worth the savings, and we can help you figure that out.
What to consider when thinking about a rate-and-term refinance
Take advantage of lower interest rates: If rates have dropped since you purchased your home, you’ll save over the long-term life of the loan by refinancing to lower your interest rate.
Lower your monthly mortgage payments: It’s never a problem to lower your monthly payments, right? Refinance to save so you can achieve other financial goals.
Allow you to pay off your loan faster:Paying off your loan faster can save you thousands, if not hundreds of thousands of dollars. Refinancing your loan to a shorter term lowers the total amount of interest you pay in the long run.
Eliminate the cost of PMI: Private mortgage insurance is a federal requirement on your loan if you made less than a 20% down payment. This adds an extra cost on top of your monthly mortgage payment, taxes and insurance. Refinancing can eliminate this extra cost so you can save money each month.
Things to consider:
Affordability: Will the cost of the new loan be worth the savings?
Housing market trends: What’s happening in the housing market when you’re looking to refinance? If home prices are up since you first purchased, it may mean that you have more equity in your home. But if prices have dropped, you want to make sure it’s worth it in the long run.
Interest rates: Your new loan will have a different interest rate so checking on rates is an important step when thinking about a refinance.
If you think this might be the right option for you, we’d love to connect. Wherever you are on your journey as a homeowner, we’re here to help. Our refinance guide is a great resource as you move forward on your journey. Our local loan officers can work with you directly to make sure you get the best possible loan for your situation. Contact us today!
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction. *By refinancing an existing loan, total finance charges may be higher over the life of the loan. *Information is for general illustrative purposes only. The information is believed to be reliable, but Guild Mortgage does not warrant its completeness, timeliness or accuracy. Guild Mortgage assumes no responsibility for errors or omissions in the information provided. *Typically, a non-purchase second mortgage. **Please consult your financial advisor on the consolidation of short term debt into long term debt.