Rate-and-Term Refinance

A rate-and-term refinance replaces your existing mortgage with a new mortgage that has different rate, term, or both — without pulling cash out. The loan amount stays roughly the same as your existing balance plus closing costs.

While cash-out refinance extracts equity, rate-and-term restructures your loan terms to optimize the deal you already have. Lower rate. Shorter term. Different program. Same loan amount, different package.

How rate-and-term refinance works

Three common scenarios:

1. Lower rate. Current mortgage at a higher rate; current market rates are lower. You refinance into a new loan at the lower rate to reduce monthly payment and total interest paid over the loan term.

2. Shorter term. Current 30-year mortgage; you want to pay off faster. Refinance into a 15- or 20-year loan to accelerate payoff and reduce total interest, often at slightly lower rates than 30-year terms.

3. Program change. Switch loan types. Common moves: FHA to conventional (drop MIP), ARM to fixed-rate (lock in stability), conventional to DSCR (free up conventional slot, transition to property-income qualification).

The breakeven calculation

Rate-and-term only makes sense if the savings outweigh the closing costs over your hold period.

Breakeven = Closing costs ÷ Monthly payment savings

Example: Refinancing saves $300/month. Closing costs are $9,000.

• Breakeven = $9,000 ÷ $300 = 30 months (2.5 years)
• If you'll hold the property for 5+ more years, refinance pencils.
• If you'll sell in 18 months, refinance loses money.

Always run the breakeven before pulling the trigger.

When rate-and-term refinance makes sense

Rate dropped meaningfully since you closed. If your current rate is 0.50% or more above current market rates and you'll hold 3+ more years, refinance is usually worth it.

You want to drop FHA MIP. FHA loans require lifetime MIP. If you've reached 20%+ equity, refinancing into conventional drops the MIP — often saving 0.55-0.85% annually on the loan balance.

You're scaling and need conventional capacity freed up. Refinance an existing conventional rental into DSCR. The slot becomes available for your next primary residence or investment property purchase under conventional rules.

You want to transition from ARM to fixed. If your ARM is approaching reset and rates have moved against you, refinancing into a fixed-rate locks in predictability.

You inherited or bought property with terms you didn't choose. Sub-optimal loan structure from an estate, divorce, or quick acquisition can be restructured later.

Rate-and-term vs. cash-out refinance

Both replace your existing mortgage, but the goals differ:

• Rate-and-term: Optimize loan terms. No cash extracted. Closing costs only.
• Cash-out: Extract equity. Loan balance increases. Larger closing costs.

Rate-and-term loans typically price slightly lower than cash-out loans because the lender's risk is lower (you're not taking equity out, you're just restructuring debt).

Costs to consider

Even no-cost refinances aren't really free — costs are typically rolled into the rate or loan balance:

• Origination/lender fees: 0.5-1.5% of loan amount typical
• Title insurance: Required again (lender's policy)
• Appraisal: $400-800 typical
• Recording fees: $50-200 depending on jurisdiction
• Prepaid interest, property taxes, insurance: Per-loan adjustments

Total closing costs typically 2-4% of loan amount. On a $400K loan, that's $8-16K.

Rate Hero's take

For investors holding rentals, rate-and-term refinances are an underutilized tool. Specifically: refinancing existing conventional rentals into DSCR loans frees up conventional slots for primary residence flexibility and removes the property's mortgage from your personal DTI calculation. We see investors do this transition repeatedly across their portfolio as scale demands it.

If your existing rate is meaningfully above market or you're hitting conventional limits, talk to us about rate-and-term options. We'll run the breakeven calculation, compare current market rates against your existing loan, and tell you whether the refinance pencils for your hold horizon.