Rate and Term Refinance

Updated 2026-05-17

A Rate and Term Refinance is a type of mortgage refinance where a new mortgage replaces an existing one primarily to obtain a better interest rate or to change the loan term. Unlike a Cash-out Refinance, this type of refinance does not involve taking cash out of the home's equity.

Purpose and Benefits

The primary goals of a rate and term refinance include:

• Lowering the Interest Rate: Securing a new loan with a lower interest rate than the existing mortgage, which can significantly reduce the total cost of the loan and monthly payments.
• Reducing Monthly Payments: A lower interest rate or a longer loan term can result in a smaller monthly mortgage payment, freeing up disposable income.
• Changing the Loan Term: Adjusting the loan duration, such as moving from a 30-year term to a 15-year term to pay off the mortgage faster, or vice-versa to reduce monthly payments.
• Switching Loan Types: Converting an Adjustable-Rate Mortgage (ARM) (ARM) to a Fixed-Rate Mortgage to achieve payment stability and predictability.

General Requirements

While specific requirements may vary by lender, common qualifications for a rate and term refinance include:

• Credit Score: Most lenders typically require a minimum credit score of at least 620. A higher score generally leads to more favorable interest rates.
• Home Equity: Borrowers usually need to have at least 20% equity in their home.
• Debt to Income DTI Ratio: Lenders assess the borrower's DTI ratio to ensure they can comfortably afford the new mortgage payments.
• Payment History: A consistent history of on-time mortgage payments, often for the preceding 12 months, is typically required.

Consumer Protections

The federal Right of Rescission law applies to most mortgage refinances with a new lender, granting consumers three business days to cancel the transaction without penalty. This protection is governed by the Truth in Lending Act (TILA) and its implementing regulation, Regulation Z (12 CFR § 1026.23).

Costs

Closing Costs for a refinance typically range from 2% to 6% of the loan amount. These costs can sometimes be rolled into the new loan, increasing the principal balance but reducing upfront out-of-pocket expenses.