When you first delve into the world of real estate, it can feel like there is a whole other language that you need to learn, especially around mortgages and financing. This post will take a look at the term “rate and term refinance” in order to clarify what it means once and for all.
If you’ve heard the term before and are wondering how it can benefit you, read on below. We’ve laid out what it means and how it differs from other types of refinancing, as well as some of the advantages and disadvantages to refinancing your loan. Armed with this information, you should be able to make an informed decision about whether or not a rate and term refinance is right for you.
What does it mean to refinance?
In the real estate industry, “refinancing” refers to the act of replacing your existing home loan with a new one. Homeowners often refinance their mortgages as a way to save money, to pay off their loan sooner, or to use the equity in their home to pay for some of life’s big expenses.
What is a rate and term refinance?
A rate and term refinance tends to be the most simple way to refinance. With this type of refinance, the loan amount stays the same, meaning that you’ll still owe the same amount that you currently owe on your home.
Here, the only thing that’s changing about your mortgage is either the APR, the loan term, or both of them. In this case, the APR denotes how much you’re paying to borrow the money. The loan term, on the other hand, refers to how long you have to pay the loan back in full.
Rate and term refinances are the easy choice if you qualify and your main goal is to save money. When interest rates go down, and if you qualify for the lower rate, you can use a rate and term refinance to lower your monthly payment. If you have an adjustable-rate mortgage, you can use this type of refinance to switch to a fixed-rate option. Alternatively, if you want to pay off your home sooner, you could use this refinance to switch from a 30-year loan to a 15-year one instead.
What is a cash-out refinance?
Another type of refinance is known as a cash-out refinance. With a cash-out refinance, you actually borrow more money than you currently owe on your home. The difference between the amount of equity you have in the home (the value) and the amount of the lien(s) is then given to you in the form of cash that can be used however you wish.
Most people use cash-out refinances to cover some of life’s biggest expenses. For example, you could use it to fund your children’s college educations, pay back medical debt, or in order to finance some much-needed renovations on your home.
Keep in mind, however, that with a cash-out refinance, your monthly payment is likely to go up. Since you’re borrowing more money than you owe, the total balance on your mortgage will go up and your payment will reflect that.
What are the top benefits of refinancing?
The biggest benefit of refinancing, especially with a rate and term refinance, is that it gives you the option to save money. If interest rates have gone down since you first purchased a home, refinancing to a lower rate should inherently lower your monthly payment. But, even if the interest rates have not changed all that much, spreading your current mortgage amount over a longer loan term may also save money in the short-term, depending on how long you’ve already been paying your mortgage.
In addition to money saved, there’s also added flexibility to consider. With a rate and term refinance, you have the option of switching from a 30-year loan to a 15-year option so that you can pay off your home sooner. You also have the option of switching from an adjustable-rate mortgage to a fixed-rate option in order to make your payments more stable.
What are the disadvantages of refinancing?
It’s important to note that refinancing does come at a cost. When you refinance your mortgage, you are effectively taking out a new loan. You’ll have to pay closing costs on the new loan, which can often end up being thousands of dollars. Yet, the investment might be worth it if the interest savings in the long term makes up for it.
Additionally, unless you change the term of your loan, you’re essentially starting the clock all over again on your mortgage. For instance, if you’ve been paying off your mortgage for ten years before you refinance, and you refinance into a 30-year loan, it will take you 40 years, in total, to pay off your home.
The exception to that is if you change the term of your mortgage from a 30-year to a 15-year loan. However, at that point, your payment is very likely to go up since your new loan term is much shorter than the old one.