Rate-and-Term Refinance: What It Means for Homeowners in 2026

A rate-and-term refinance gives you a new loan with a different interest rate, repayment term, or both, but it doesn't change the amount you owe.

Author: Casey Foster

Published on: 3/10/2026|15 min read

Fact Checked

Author: Casey Foster|Published on: 3/10/2026|15 min read

Fact Checked

Key Takeaways

With a rate-and-term refinance, you can lower your interest rate, change the length of your loan, or switch loan types without borrowing more than you already owe.
Because your mortgage balance stays about the same, this kind of refinance is sometimes called a "no cash-out refinance."
To be eligible, you usually need to have at least 20% equity, a credit score of 620 or higher, and a debt-to-income ratio of less than 43%.
Before you sign on the dotted line, you should figure out your break-even point because closing costs on a rate-and-term refinance usually range from 2% to 6% of the loan amount.
Rate-and-term refinancing usually has lower interest rates than cash-out refinancing because the lender doesn't have to worry about you increasing your loan balance.
People who have FHA, VA, or USDA loans may be able to use streamline refinance programs that don't require an appraisal and have less paperwork.
To decide if a rate-and-term refinance makes sense, you need to know how long you plan to stay in your home and how much you will save each month.

What Is a Rate-and-Term Refinance?

A rate-and-term refinance is a type of mortgage refinance that replaces your current home loan with a new one. The goal is to get better terms. That might mean a lower interest rate, a shorter payoff timeline, a longer term with smaller monthly payments, or a different loan type altogether. What it doesn’t do is let you pull cash out of your equity.

Think of it this way. You’re swapping one mortgage for another, but you’re not borrowing extra money. Your loan balance stays about the same, minus whatever you’ve already paid down on the principal. That’s why lenders sometimes call it a “no cash-out refinance” or a “limited cash-out refinance.”

Why does this matter to you? Because mortgage rates don’t stay put. Maybe you bought your home when rates were sitting around 7% or higher, and now they’ve come down. Or maybe your credit score has improved since you first closed, and you qualify for a better deal. A rate-and-term refinance gives you a way to capture that improvement without touching the equity you’ve built.

According to the Consumer Financial Protection Bureau, rate-and-term refinances historically attract borrowers with stronger credit profiles and higher incomes compared to those who choose cash-out refinancing. That pattern makes sense. Borrowers doing a rate-and-term refi are usually focused on saving money over time, not accessing cash today.

The concept has been around for as long as mortgage lending itself. Whenever interest rates shift, homeowners look for ways to adjust their loans. Rate-and-term refinancing became especially popular during periods of falling rates, and it remains one of the most straightforward tools homeowners have for managing their mortgage costs.

How a Rate-and-Term Refinance Works

The process looks a lot like getting your original mortgage. You apply, get approved, and close on a new loan that pays off the old one. But there are a few details worth understanding so you know what to expect.

First, you’ll want to take stock of where you stand financially. Check your credit score, calculate your current home equity, and look at your debt-to-income ratio (DTI). These three numbers drive most of the refinance decision.

Next, shop around. You’re not locked into your current lender. In fact, comparing loan offers from at least three different lenders is one of the best ways to make sure you’re getting the most competitive rate. AmeriSave can help you compare rates and see what terms you might qualify for based on your financial picture.

Once you pick a lender and submit your application, the underwriting process begins. Your lender will verify your income, employment, and assets. They’ll also pull your credit and order a home appraisal to confirm your property’s current market value. That appraisal matters because it determines your loan-to-value ratio (LTV), which affects both your eligibility and your rate.

After underwriting wraps up, you’ll receive a Closing Disclosure at least three business days before closing. The CFPB requires lenders to provide this document so you can review your final loan terms, monthly payment, and all closing costs before you sign anything. Compare it carefully to the Loan Estimate you received earlier. If something looks off, ask questions.

At closing, you sign the new loan documents, pay your closing costs, and your old mortgage gets paid off. From that point forward, you make payments on the new loan.

One thing I should mention. Many lenders offer a rate lock, which freezes your interest rate for 30 to 60 days while your application is being processed. Rates can move daily, so locking in protects you if rates rise between application and closing. Ask about this early in the process.

Benefits of a Rate-and-Term Refinance

Lowering Your Interest Rate

This is the big one. If rates have dropped since you got your mortgage, refinancing to a lower rate reduces both your monthly payment and the total interest you’ll pay over the life of the loan. Even a drop of half a percentage point can add up to real money.

Let’s run the numbers. Say you have a $300,000 loan at 7.25% on a 30-year term. Your monthly principal and interest payment is about $2,047. If you refinance to 6.25%, that payment drops to roughly $1,847. That’s $200 less every month, or $2,400 a year. Over the remaining life of the loan, those savings compound.

Shortening Your Loan Term

Switching from a 30-year mortgage to a 15-year mortgage means you’ll pay the loan off faster and spend less on interest overall. The trade-off? Your monthly payment goes up because you’re compressing the same balance into fewer years. But if your budget can handle it, the interest savings are substantial.

Using that same $300,000 loan at 6.25%, a 15-year term would raise your payment to about $2,572 per month. That’s $725 more than the 30-year option. But here’s the thing. You’d pay roughly $162,960 in total interest on the 15-year loan compared to about $364,920 on the 30-year. That difference of over $200,000 is worth thinking about.

Extending Your Loan Term

Sometimes the priority isn’t paying off your home faster. It’s freeing up cash flow right now. If you’re on a 15-year or 20-year mortgage and your monthly payments feel tight, refinancing into a new 30-year term spreads out the remaining balance and lowers what you owe each month. You’ll pay more interest over time, but the breathing room in your budget can be worth it during a rough stretch.

Switching Your Loan Type

Rate-and-term refinancing also lets you change your loan type entirely. Maybe you started with an adjustable-rate mortgage (ARM) to take advantage of a lower introductory rate, but now you want the predictability of a fixed rate. Or maybe you originally got an FHA loan and now have enough equity to refinance into a conventional loan, which could eliminate your mortgage insurance premium. That’s a real cost savings, especially since FHA mortgage insurance can stick around for the life of the loan.

Dropping Mortgage Insurance

Speaking of mortgage insurance, if your home’s value has gone up or you’ve paid down enough principal to reach 20% equity, a rate-and-term refinance can help you get rid of private mortgage insurance (PMI). On a $300,000 loan, PMI might cost between $125 and $375 per month depending on your credit and down payment. Eliminating it is a direct boost to your monthly budget. AmeriSave’s loan team can help you figure out whether your equity position qualifies you to drop PMI through a refinance.

Rate-and-Term Refinance vs. Cash-Out Refinance

People sometimes confuse these two, so let’s get clear on how they’re different.

With a rate-and-term refinance, you’re replacing your mortgage with a new one that has better terms. Your loan balance doesn’t grow. You’re adjusting the rate, the term, or both.

A cash-out refinance is different. You’re borrowing more than you currently owe and pocketing the difference as cash. Say you owe $200,000 on a home worth $350,000. A cash-out refi might let you take out a new $280,000 mortgage and walk away with $80,000 in cash. That money can go toward home improvements, debt consolidation, or other expenses.

The key differences come down to risk and cost. Cash-out refinances generally carry higher interest rates because the lender is taking on a bigger loan. They also have stricter equity requirements. Fannie Mae allows limited cash-out refinances (rate-and-term) with LTV ratios up to 97% for qualifying borrowers, while cash-out refinances are typically capped at 80% LTV.

So when would you choose one over the other? If your goal is saving money on your mortgage, go with rate-and-term. If you need cash for a big expense and have the equity to support it, cash-out might make more sense. Just understand that you’re increasing your debt when you go the cash-out route.

Requirements for a Rate-and-Term Refinance

Qualifying for a rate-and-term refinance is similar to qualifying for your original mortgage. Lenders look at the same core factors, though the specific thresholds can vary.

Credit Score

Most lenders look for a credit score of at least 620 for a conventional rate-and-term refinance. Higher scores generally unlock better rates. Government-backed loan programs sometimes have more flexibility. FHA Streamline and VA Streamline (also called Interest Rate Reduction Refinance Loans) don’t always require a minimum credit score, though individual lenders may set their own thresholds.

Debt-to-Income Ratio

Your DTI ratio compares your total monthly debt payments to your gross monthly income. Most lenders prefer a DTI of 43% or lower for conventional refinances. Some will go higher with strong compensating factors like a large cash reserve or an excellent credit score. At AmeriSave, loan officers review the full picture of your financial situation to see what options are available.

Home Equity and Loan-to-Value Ratio

Equity is the difference between what your home is worth and what you owe on it. Most lenders want you to have at least 20% equity to avoid paying mortgage insurance on the refinanced loan. However, it’s possible to refinance with less. Fannie Mae’s standard limited cash-out refinance program allows LTV ratios up to 97% for qualifying primary residences, though you’ll need PMI if your LTV exceeds 80%.

Documentation You’ll Need

Plan on gathering your two most recent pay stubs, W-2 forms from the past two years, recent bank statements, and your current mortgage statement. Self-employed borrowers may need additional documentation like tax returns and profit-and-loss statements. Having these ready before you apply speeds up the process.

Costs and Fees in a Rate-and-Term Refinance

Refinancing isn’t free. You’ll pay closing costs, just like you did when you bought the home. Those costs typically run between 2% and 6% of the loan amount.

On a $300,000 refinance, that means you’re looking at somewhere between $6,000 and $18,000 in fees. That range is wide because closing costs vary by lender, location, and the specifics of your loan. Common fees include the loan origination charge, the appraisal fee, title insurance, title search fees, and credit report fees.

The CFPB found that median total loan costs for refinance transactions jumped 49.3% between 2021 and 2022, reaching $4,979. Part of that increase came from a surge in discount points. About 50.2% of borrowers paid discount points, the highest rate recorded since tracking began.

This is where the break-even calculation becomes your best friend. Take your total closing costs and divide them by the monthly savings from your new, lower payment. The result tells you how many months it’ll take to recoup what you spent on the refinance.

Here’s an example. If your closing costs total $8,000 and you save $200 per month with the new rate, your break-even point is 40 months. That’s about three and a half years. If you plan to stay in your home longer than that, the refinance pays for itself. If you’re thinking about selling before then, you might want to hold off.

Some lenders offer a “no-closing-cost” refinance, but read the fine print. Those costs don’t disappear. They’re either rolled into your loan balance, which means you’re paying interest on them for years, or folded into a slightly higher interest rate. Both options cost more in the long run.

When a Rate-and-Term Refinance Makes Sense

Not every market condition calls for a refinance, and not every homeowner benefits from one. Here are some situations where it tends to pay off.

Rates have dropped since your original loan. Even a reduction of 0.5% to 1% can produce meaningful monthly savings, depending on your balance. If rates are down a full percentage point or more from when you bought, it’s worth running the numbers. AmeriSave’s rate comparison tools can give you a quick snapshot of where you stand today.

Your credit score has improved. If you’ve been working on paying down debt and building your score, you may now qualify for a rate you couldn’t get before. Lenders price risk, and a higher score signals lower risk.

You want to get out of an ARM. Adjustable-rate mortgages can be great for the first few years, but once that introductory period ends, your rate can jump. Refinancing into a fixed-rate loan locks in predictable payments for the rest of the term.

You want to drop mortgage insurance. If your home value has gone up or you’ve paid down enough principal, refinancing into a conventional loan with 20% equity gets rid of that monthly PMI cost. For homeowners in markets where property values have risen, this can happen faster than expected.

You want to pay off your home sooner. Shortening your term from 30 years to 15 or 20 years puts you on a faster track to owning your home outright. The monthly cost goes up, but the long-term savings on interest are usually worth it if your budget allows.

Now, there are times when it doesn’t make sense. If you’re planning to sell within a year or two, the closing costs probably won’t be worth it. Same thing if rates haven’t moved much since your original loan. And if you’re close to paying off your mortgage, refinancing into a new 30-year term restarts the clock on interest. That’s a step backward for most people.

Putting a Rate-and-Term Refinance into Practice

Numbers help, so let’s walk through a full scenario.

Consider a homeowner who bought a house five years ago for $375,000. They put 10% down ($37,500) and took out a $337,500 conventional 30-year fixed mortgage at 7.1%. Their monthly principal and interest payment has been about $2,268. After five years of payments, their remaining balance is roughly $321,000. Meanwhile, the home’s value has climbed to about $425,000, giving them approximately $104,000 in equity, or about 24.5% LTV.

Now rates have come down. They qualify for a new 30-year fixed rate of 6.25% on that $321,000 balance. The new monthly principal and interest payment drops to roughly $1,976. That’s a savings of $292 per month. Over a year, that’s $3,504 back in their pocket.

But don’t forget closing costs. At 3% of the loan amount, they’re looking at about $9,630. Divide those costs by the $292 monthly savings, and the break-even point lands at roughly 33 months, or just under three years. If they plan to stay in the home for at least that long, the refinance makes financial sense.

Here’s what makes this example even better. Because their LTV is now below 80%, they also eliminate PMI, which they’ve been paying since they originally put down less than 20%. If their PMI was running $175 per month, their actual total savings jump to $467 per month. That changes the break-even to just 21 months.

But what if they chose a 20-year term instead of another 30-year loan? At 6.25% on $321,000, a 20-year term would give them a payment of about $2,347 per month. That’s actually $79 more per month than their original payment. So no monthly savings. But they’d own the home free and clear in 20 years instead of 25 remaining years on the old loan, and they’d pay considerably less total interest. It’s a different set of priorities. AmeriSave can help run both scenarios side by side so you can see which path fits your goals.

What I keep seeing with homeowners in situations like this is that they focus entirely on the monthly payment. That’s understandable. But the total cost of the loan matters too. A lower monthly payment on a fresh 30-year term feels great right now, but it means you’re restarting the interest clock. Make sure you look at both the short-term relief and the long-term cost before deciding.

Questions to Ask Your Lender Before Refinancing

Being ready for a refinance conversation can save you time and money. These are some things you should talk about with any lender you talk to.

How much will the refinance cost in total, including all fees? Don't only think about the interest rate. You should ask for the APR, which includes fees, and a full list of all the fees on the Loan Estimate.

Can I lock in my rate, and for how long? Rate locks keep you safe from changes in the market. Most lenders offer locks that last 30 to 60 days, but some charge for longer ones. Know what's in it.

Do I need an appraisal, and what happens if it comes in low? A low appraisal can change your LTV ratio, which could change your rate or eligibility. Find out what the lender does about this.
Is there a fee for paying off my loan early? Some older mortgages have a fee for paying off the loan early. Make sure you check before you refinance so you don't get an unexpected fee.

What are my options if I have less than 20% equity? Not everyone has a big equity cushion. Ask about programs that accommodate lower equity levels and what the added costs, like PMI, would look like.

Streamline Refinance Options for Government-Backed Loans

You might be able to get a streamlined refinance if you have an FHA, VA, or USDA loan. These programs make the rate-and-term refinance process easier by cutting down on paperwork and, in many cases, getting rid of the need for a new appraisal.

Borrowers with FHA loans who want to lower their rate or switch from an ARM to a fixed-rate mortgage can use FHA Streamline refinancing. FHA doesn't need to check your income or pull your credit, but your lender may have its own rules. You do need to have made at least six months' worth of on-time payments on your current loan.

VA Interest Rate Reduction Refinance Loans (IRRRLs) are good for veterans and service members who already have VA loans. There is no minimum credit score or appraisal needed for IRRRLs from the VA. The goal is to give qualified borrowers a quick and cheap way to get a lower rate.

Homeowners in rural and suburban areas who already have USDA loans can use USDA Streamline refinancing. It skips the appraisal and makes paperwork easier, just like the FHA and VA programs.

These programs can help borrowers save time and money. A streamline refi from AmeriSave could be one of the easiest ways to save money if you have a government-backed loan and the current rates are lower than what you're paying.

The Bottom Line

One of the best ways for homeowners to improve their mortgage is to do a rate-and-term refinance. This kind of refinance makes things easy because it doesn't add to what you owe.

You can get a lower rate, a shorter payoff schedule, or a way to get rid of mortgage insurance. Doing the math is the most important thing. Look at what's out there and compare it to your current terms. Don't forget to include closing costs, and make sure you'll stay in the house long enough for the savings to be worth the upfront cost. AmeriSave can help you understand your options and show you what a rate-and-term refinance would look like for you.

Frequently Asked Questions

A rate-and-term refinance changes your interest rate, loan term, or both, but it doesn't change how much you owe on your loan. A cash-out refinance lets you borrow more than you owe and get the extra money in cash.

Because the lender is taking on more risk, cash-out refinances usually have higher interest rates and stricter equity requirements. If your main goal is to lower your monthly payment or total interest cost, rate-and-term refinances are the better option. AmeriSave has both cash-out refinance and rate-and-term options. You can compare them side by side with the help of a loan officer.

The closing costs for a rate-and-term refinance are usually between 2% and 6% of the amount of the loan. If you borrow $250,000, that means you will have to pay back $5,000 to $15,000.
Fees usually cover things like origination fees, appraisal fees, title insurance, and credit report costs. Recent data from the CFPB shows that the median closing costs for refinancing were $4,979. You can look at AmeriSave's current mortgage rates to get an idea of how much money you could save on these closing costs.

For a rate-and-term refinance, most traditional lenders want a credit score of at least 620. Sometimes, government-backed streamline programs don't have a minimum score requirement or have a lower one.

Usually, a higher score means you can get lower rates. For instance, someone with a 760 score may get a rate that is 0.25% to 0.5% lower than someone with a 660 score. The Streamline and VA IRRRL programs don't require a certain score from the agency, but lenders can set their own. If you get prequalified with AmeriSave, you'll know where you stand.

It usually takes 30 to 45 days from when you apply for a rate-and-term refinance to when it closes. Streamline refinance programs for FHA, VA, and USDA loans can sometimes close faster because they don't need as much paperwork.

Delays usually happen when the paperwork isn't all there or the appraisal takes longer than planned. Getting your financial papers in order before you apply helps things move along. You can begin the process by filling out an online application with AmeriSave. Your loan team will then give you a personalized timeline.

Yes. Many homeowners switch from an FHA loan to a regular loan after they have at least 20% equity in their home. This change can get rid of the FHA mortgage insurance premium that most FHA loans have for the life of the loan.

You will need to meet the credit and DTI requirements for a conventional loan, which are usually a credit score of 620 and a DTI of less than 43%. If you stop paying FHA mortgage insurance, you could save several hundred dollars a month. An AmeriSave FHA loan expert can help you understand the numbers that are unique to your current loan balance.

The usual amount of equity needed to refinance is 20%, but you can do it with less. Fannie Mae's limited cash-out refinance program lets you borrow up to 97% of the value of your primary residence, but you'll have to pay PMI if you have less than 20% equity.

Keep in mind that having less equity usually means a higher interest rate and the extra cost of mortgage insurance. PMI can cost between $125 and $375 a month on a $300,000 loan. You can find out how much equity you have by comparing the balance on your mortgage to the current market value of your home. You can also ask AmeriSave about getting an appraisal.

It depends on what kind of loan you have. Most lenders want to see at least six months of payment history, but conventional loans don't usually have a required waiting period. You have to wait six months after your original closing date before you can refinance an FHA loan.

VA IRRRLs need at least 210 days from the first payment or six months from closing, whichever comes first. You also need to make six months of on-time payments for USDA Streamline refinances. These waiting times are good for both the borrower and the lender. You can use AmeriSave's prequalification tool to find out if you qualify and see how your current loan is doing.

Yes. A rate-and-term refinance into a conventional loan can get rid of PMI completely if you have enough equity to bring your LTV ratio below 80%. This is true no matter how your equity grew, whether it was from the value of your home going up, paying down the principal, or both.
Depending on the size of your loan and the amount of your original down payment, dropping PMI can save you $100 to $375 or more a month. This is especially helpful for people who already have FHA loans, since mortgage insurance usually lasts for the entire loan term. You can use AmeriSave's mortgage calculator to figure out how much your new payment will be without PMI.

The break-even point is the number of months it takes for your monthly savings to equal the amount you paid in closing costs. To find out how much you can save each month, divide your closing costs by the amount you can save each month. If you spend $7,500 and save $250 a month, you will break even in 30 months. If you plan to live in the house for more than 30 months, the refinance will save you money in the long run. If you plan to move or sell soon, the costs may be more than the benefits. One of the easiest ways to figure out if refinancing is right for you is to do this calculation before you apply. You can use AmeriSave's refinance calculator to see how these situations might play out.

If your ARM's introductory period is coming to an end and you're worried about rates going up, refinancing into a fixed-rate mortgage locks in a set payment. This is one of the most common reasons why people refinance their homes.

After the introductory period, ARM rates change based on market indexes. This can make your payment go up a lot. A fixed rate takes away that uncertainty. It's best to make this change while rates are still good. Find out what today's rates are at AmeriSave and get prequalified to see what you could lock in.

Key Takeaways
What Is a Rate-and-Term Refinance?
How a Rate-and-Term Refinance Works
Benefits of a Rate-and-Term Refinance
Rate-and-Term Refinance vs. Cash-Out Refinance
Requirements for a Rate-and-Term Refinance
Costs and Fees in a Rate-and-Term Refinance
When a Rate-and-Term Refinance Makes Sense
Putting a Rate-and-Term Refinance into Practice
The Bottom Line
FAQs

What Is a Rate-and-Term Refinance? A rate-and-term refinance is a type of mortgage refinance that replaces your current home loan with a new one. The goal is to get better terms. That might mean a lower interest rate, a shorter payoff timeline, a longer term with smaller monthly payments, or a different loan type altogether. What it doesn’t do is let you pull cash out of your equity. Think of it this way. You’re swapping one mortgage for another, but you’re not borrowing extra money. Your loan balance stays about the same, minus whatever you’ve already paid down on the principal. That’s why lenders sometimes call it a “no cash-out refinance” or a “limited cash-out refinance.” Why does this matter to you? Because mortgage rates don’t stay put. Maybe you bought your home when rates were sitting around 7% or higher, and now they’ve come down. Or maybe your credit score has improved since you first closed, and you qualify for a better deal. A rate-and-term refinance gives you a way to capture that improvement without touching the equity you’ve built. According to the Consumer Financial Protection Bureau, rate-and-term refinances historically attract borrowers with stronger credit profiles and higher incomes compared to those who choose cash-out refinancing. That pattern makes sense. Borrowers doing a rate-and-term refi are usually focused on saving money over time, not accessing cash today. The concept has been around for as long as mortgage lending itself. Whenever interest rates shift, homeowners look for ways to adjust their loans. Rate-and-term refinancing became especially popular during periods of falling rates, and it remains one of the most straightforward tools homeowners have for managing their mortgage costs. How a Rate-and-Term Refinance Works The process looks a lot like getting your original mortgage. You apply, get approved, and close on a new loan that pays off the old one. But there are a few details worth understanding so you know what to expect. First, you’ll want to take stock of where you stand financially. Check your credit score, calculate your current home equity, and look at your debt-to-income ratio (DTI). These three numbers drive most of the refinance decision. Next, shop around. You’re not locked into your current lender. In fact, comparing loan offers from at least three different lenders is one of the best ways to make sure you’re getting the most competitive rate. AmeriSave can help you compare rates and see what terms you might qualify for based on your financial picture. Once you pick a lender and submit your application, the underwriting process begins. Your lender will verify your income, employment, and assets. They’ll also pull your credit and order a home appraisal to confirm your property’s current market value. That appraisal matters because it determines your loan-to-value ratio (LTV), which affects both your eligibility and your rate. After underwriting wraps up, you’ll receive a Closing Disclosure at least three business days before closing. The CFPB requires lenders to provide this document so you can review your final loan terms, monthly payment, and all closing costs before you sign anything. Compare it carefully to the Loan Estimate you received earlier. If something looks off, ask questions. At closing, you sign the new loan documents, pay your closing costs, and your old mortgage gets paid off. From that point forward, you make payments on the new loan. One thing I should mention. Many lenders offer a rate lock, which freezes your interest rate for 30 to 60 days while your application is being processed. Rates can move daily, so locking in protects you if rates rise between application and closing. Ask about this early in the process. Benefits of a Rate-and-Term Refinance Lowering Your Interest Rate This is the big one. If rates have dropped since you got your mortgage, refinancing to a lower rate reduces both your monthly payment and the total interest you’ll pay over the life of the loan. Even a drop of half a percentage point can add up to real money. Let’s run the numbers. Say you have a $300,000 loan at 7.25% on a 30-year term. Your monthly principal and interest payment is about $2,047. If you refinance to 6.25%, that payment drops to roughly $1,847. That’s $200 less every month, or $2,400 a year. Over the remaining life of the loan, those savings compound. Shortening Your Loan Term Switching from a 30-year mortgage to a 15-year mortgage means you’ll pay the loan off faster and spend less on interest overall. The trade-off? Your monthly payment goes up because you’re compressing the same balance into fewer years. But if your budget can handle it, the interest savings are substantial. Using that same $300,000 loan at 6.25%, a 15-year term would raise your payment to about $2,572 per month. That’s $725 more than the 30-year option. But here’s the thing. You’d pay roughly $162,960 in total interest on the 15-year loan compared to about $364,920 on the 30-year. That difference of over $200,000 is worth thinking about. Extending Your Loan Term Sometimes the priority isn’t paying off your home faster. It’s freeing up cash flow right now. If you’re on a 15-year or 20-year mortgage and your monthly payments feel tight, refinancing into a new 30-year term spreads out the remaining balance and lowers what you owe each month. You’ll pay more interest over time, but the breathing room in your budget can be worth it during a rough stretch. Switching Your Loan Type Rate-and-term refinancing also lets you change your loan type entirely. Maybe you started with an adjustable-rate mortgage (ARM) to take advantage of a lower introductory rate, but now you want the predictability of a fixed rate. Or maybe you originally got an FHA loan and now have enough equity to refinance into a conventional loan, which could eliminate your mortgage insurance premium. That’s a real cost savings, especially since FHA mortgage insurance can stick around for the life of the loan. Dropping Mortgage Insurance Speaking of mortgage insurance, if your home’s value has gone up or you’ve paid down enough principal to reach 20% equity, a rate-and-term refinance can help you get rid of private mortgage insurance (PMI). On a $300,000 loan, PMI might cost between $125 and $375 per month depending on your credit and down payment. Eliminating it is a direct boost to your monthly budget. AmeriSave’s loan team can help you figure out whether your equity position qualifies you to drop PMI through a refinance. Rate-and-Term Refinance vs. Cash-Out Refinance People sometimes confuse these two, so let’s get clear on how they’re different. With a rate-and-term refinance, you’re replacing your mortgage with a new one that has better terms. Your loan balance doesn’t grow. You’re adjusting the rate, the term, or both. A cash-out refinance is different. You’re borrowing more than you currently owe and pocketing the difference as cash. Say you owe $200,000 on a home worth $350,000. A cash-out refi might let you take out a new $280,000 mortgage and walk away with $80,000 in cash. That money can go toward home improvements, debt consolidation, or other expenses. The key differences come down to risk and cost. Cash-out refinances generally carry higher interest rates because the lender is taking on a bigger loan. They also have stricter equity requirements. Fannie Mae allows limited cash-out refinances (rate-and-term) with LTV ratios up to 97% for qualifying borrowers, while cash-out refinances are typically capped at 80% LTV. So when would you choose one over the other? If your goal is saving money on your mortgage, go with rate-and-term. If you need cash for a big expense and have the equity to support it, cash-out might make more sense. Just understand that you’re increasing your debt when you go the cash-out route. Requirements for a Rate-and-Term Refinance Qualifying for a rate-and-term refinance is similar to qualifying for your original mortgage. Lenders look at the same core factors, though the specific thresholds can vary. Credit Score Most lenders look for a credit score of at least 620 for a conventional rate-and-term refinance. Higher scores generally unlock better rates. Government-backed loan programs sometimes have more flexibility. FHA Streamline and VA Streamline (also called Interest Rate Reduction Refinance Loans) don’t always require a minimum credit score, though individual lenders may set their own thresholds. Debt-to-Income Ratio Your DTI ratio compares your total monthly debt payments to your gross monthly income. Most lenders prefer a DTI of 43% or lower for conventional refinances. Some will go higher with strong compensating factors like a large cash reserve or an excellent credit score. At AmeriSave, loan officers review the full picture of your financial situation to see what options are available. Home Equity and Loan-to-Value Ratio Equity is the difference between what your home is worth and what you owe on it. Most lenders want you to have at least 20% equity to avoid paying mortgage insurance on the refinanced loan. However, it’s possible to refinance with less. Fannie Mae’s standard limited cash-out refinance program allows LTV ratios up to 97% for qualifying primary residences, though you’ll need PMI if your LTV exceeds 80%. Documentation You’ll Need Plan on gathering your two most recent pay stubs, W-2 forms from the past two years, recent bank statements, and your current mortgage statement. Self-employed borrowers may need additional documentation like tax returns and profit-and-loss statements. Having these ready before you apply speeds up the process. Costs and Fees in a Rate-and-Term Refinance Refinancing isn’t free. You’ll pay closing costs, just like you did when you bought the home. Those costs typically run between 2% and 6% of the loan amount. On a $300,000 refinance, that means you’re looking at somewhere between $6,000 and $18,000 in fees. That range is wide because closing costs vary by lender, location, and the specifics of your loan. Common fees include the loan origination charge, the appraisal fee, title insurance, title search fees, and credit report fees. The CFPB found that median total loan costs for refinance transactions jumped 49.3% between 2021 and 2022, reaching $4,979. Part of that increase came from a surge in discount points. About 50.2% of borrowers paid discount points, the highest rate recorded since tracking began. This is where the break-even calculation becomes your best friend. Take your total closing costs and divide them by the monthly savings from your new, lower payment. The result tells you how many months it’ll take to recoup what you spent on the refinance. Here’s an example. If your closing costs total $8,000 and you save $200 per month with the new rate, your break-even point is 40 months. That’s about three and a half years. If you plan to stay in your home longer than that, the refinance pays for itself. If you’re thinking about selling before then, you might want to hold off. Some lenders offer a “no-closing-cost” refinance, but read the fine print. Those costs don’t disappear. They’re either rolled into your loan balance, which means you’re paying interest on them for years, or folded into a slightly higher interest rate. Both options cost more in the long run. When a Rate-and-Term Refinance Makes Sense Not every market condition calls for a refinance, and not every homeowner benefits from one. Here are some situations where it tends to pay off. Rates have dropped since your original loan. Even a reduction of 0.5% to 1% can produce meaningful monthly savings, depending on your balance. If rates are down a full percentage point or more from when you bought, it’s worth running the numbers. AmeriSave’s rate comparison tools can give you a quick snapshot of where you stand today. Your credit score has improved. If you’ve been working on paying down debt and building your score, you may now qualify for a rate you couldn’t get before. Lenders price risk, and a higher score signals lower risk. You want to get out of an ARM. Adjustable-rate mortgages can be great for the first few years, but once that introductory period ends, your rate can jump. Refinancing into a fixed-rate loan locks in predictable payments for the rest of the term. You want to drop mortgage insurance. If your home value has gone up or you’ve paid down enough principal, refinancing into a conventional loan with 20% equity gets rid of that monthly PMI cost. For homeowners in markets where property values have risen, this can happen faster than expected. You want to pay off your home sooner. Shortening your term from 30 years to 15 or 20 years puts you on a faster track to owning your home outright. The monthly cost goes up, but the long-term savings on interest are usually worth it if your budget allows. Now, there are times when it doesn’t make sense. If you’re planning to sell within a year or two, the closing costs probably won’t be worth it. Same thing if rates haven’t moved much since your original loan. And if you’re close to paying off your mortgage, refinancing into a new 30-year term restarts the clock on interest. That’s a step backward for most people. Putting a Rate-and-Term Refinance into Practice Numbers help, so let’s walk through a full scenario. Consider a homeowner who bought a house five years ago for $375,000. They put 10% down ($37,500) and took out a $337,500 conventional 30-year fixed mortgage at 7.1%. Their monthly principal and interest payment has been about $2,268. After five years of payments, their remaining balance is roughly $321,000. Meanwhile, the home’s value has climbed to about $425,000, giving them approximately $104,000 in equity, or about 24.5% LTV. Now rates have come down. They qualify for a new 30-year fixed rate of 6.25% on that $321,000 balance. The new monthly principal and interest payment drops to roughly $1,976. That’s a savings of $292 per month. Over a year, that’s $3,504 back in their pocket. But don’t forget closing costs. At 3% of the loan amount, they’re looking at about $9,630. Divide those costs by the $292 monthly savings, and the break-even point lands at roughly 33 months, or just under three years. If they plan to stay in the home for at least that long, the refinance makes financial sense. Here’s what makes this example even better. Because their LTV is now below 80%, they also eliminate PMI, which they’ve been paying since they originally put down less than 20%. If their PMI was running $175 per month, their actual total savings jump to $467 per month. That changes the break-even to just 21 months. But what if they chose a 20-year term instead of another 30-year loan? At 6.25% on $321,000, a 20-year term would give them a payment of about $2,347 per month. That’s actually $79 more per month than their original payment. So no monthly savings. But they’d own the home free and clear in 20 years instead of 25 remaining years on the old loan, and they’d pay considerably less total interest. It’s a different set of priorities. AmeriSave can help run both scenarios side by side so you can see which path fits your goals. What I keep seeing with homeowners in situations like this is that they focus entirely on the monthly payment. That’s understandable. But the total cost of the loan matters too. A lower monthly payment on a fresh 30-year term feels great right now, but it means you’re restarting the interest clock. Make sure you look at both the short-term relief and the long-term cost before deciding. Questions to Ask Your Lender Before Refinancing Being ready for a refinance conversation can save you time and money. These are some things you should talk about with any lender you talk to. How much will the refinance cost in total, including all fees? Don't only think about the interest rate. You should ask for the APR, which includes fees, and a full list of all the fees on the Loan Estimate. Can I lock in my rate, and for how long? Rate locks keep you safe from changes in the market. Most lenders offer locks that last 30 to 60 days, but some charge for longer ones. Know what's in it. Do I need an appraisal, and what happens if it comes in low? A low appraisal can change your LTV ratio, which could change your rate or eligibility. Find out what the lender does about this. Is there a fee for paying off my loan early? Some older mortgages have a fee for paying off the loan early. Make sure you check before you refinance so you don't get an unexpected fee. What are my options if I have less than 20% equity? Not everyone has a big equity cushion. Ask about programs that accommodate lower equity levels and what the added costs, like PMI, would look like. Streamline Refinance Options for Government-Backed Loans You might be able to get a streamlined refinance if you have an FHA, VA, or USDA loan. These programs make the rate-and-term refinance process easier by cutting down on paperwork and, in many cases, getting rid of the need for a new appraisal. Borrowers with FHA loans who want to lower their rate or switch from an ARM to a fixed-rate mortgage can use FHA Streamline refinancing. FHA doesn't need to check your income or pull your credit, but your lender may have its own rules. You do need to have made at least six months' worth of on-time payments on your current loan. VA Interest Rate Reduction Refinance Loans (IRRRLs) are good for veterans and service members who already have VA loans. There is no minimum credit score or appraisal needed for IRRRLs from the VA. The goal is to give qualified borrowers a quick and cheap way to get a lower rate. Homeowners in rural and suburban areas who already have USDA loans can use USDA Streamline refinancing. It skips the appraisal and makes paperwork easier, just like the FHA and VA programs. These programs can help borrowers save time and money. A streamline refi from AmeriSave could be one of the easiest ways to save money if you have a government-backed loan and the current rates are lower than what you're paying. The Bottom Line One of the best ways for homeowners to improve their mortgage is to do a rate-and-term refinance. This kind of refinance makes things easy because it doesn't add to what you owe. You can get a lower rate, a shorter payoff schedule, or a way to get rid of mortgage insurance. Doing the math is the most important thing. Look at what's out there and compare it to your current terms. Don't forget to include closing costs, and make sure you'll stay in the house long enough for the savings to be worth the upfront cost. AmeriSave can help you understand your options and show you what a rate-and-term refinance would look like for you.