A rate and term refinance is a type of mortgage refinancing that allows you to change the terms of your current loan and replace them with terms that are more favorable for you. You get a new loan, pay off your old mortgage and then make payments toward your new loan when you refinance. A rate and term refinance can give you more or less time to pay off your loan, a lower interest rate or a different monthly payment. Some lenders refer to rate and term refinances as regular refinances.
Reasons To Do a Rate and Term Refinance
Homeowners can take advantage of a few benefits when they refinance. These include:
- Lowering your rate:Are current interest rates lower than when you got your loan? You may be able to get a lower rate. You might also qualify for a lower interest rate if you have a better credit score or less debt now than when you took your original mortgage. Taking an interest rate that’s even a fraction of a percentage lower can help you save thousands of dollars over the course of your loan. This means that it’s often beneficial to refinance whenever you can get a lower interest rate than what you’re paying currently.
- Reducing your payment:Your monthly payment goes down when you refinance a mortgage loan to a longer term. This is because you give yourself more time to pay off your loan and make more overall payments. Refinancing to a longer term and reducing your monthly payment can help you avoid foreclosure if you’re having trouble making your payments. Keep in mind that refinancing to reduce your payment means you’ll end up paying more in interest over time.
- Changing your term length:You can also refinance your mortgage loan to a shorter term. Doing so increases your monthly payment, but you end up paying less in interest over the course of your loan. This can mean thousands (or even tens of thousands) of dollars saved by the time your loan matures. Are you now earning more in income now than when you got your loan? Refinancing to a shorter term can help you own your home sooner.