Rate and Term Refinance

What is a Rate and Term Refinance?

A rate and term refinance allows you to lower your interest rate and improve your mortgage terms without changing the amount of money owed on your home. (Translation: huge savings over the life of your loan!) Completing a rate and term refinance means you hold on to the equity you have accumulated, but swap out your current mortgage for one more advantageous to you.

For example, if you want to capitalize on decreasing interest rates or save money on monthly payments without taking cash out, then a rate and term refinance would make the most sense for you.

What Does it Mean to Refinance Your Home?

When you refinance your home, you are exchanging one mortgage for another. Your old mortgage is paid off by the refinance, leaving you with a new loan that has different terms.

Because you receive a new mortgage during a refinance, you also restart the loan term from the beginning. For example, if you have 25 years left on your current mortgage and you refinance into a 30-year loan, the term is re-set, and there are another 30 years before your mortgage is paid off. Keep in mind that you can offset this “reset” by paying extra principal each month to target your current payoff date.

Why Would Someone Get a Rate and Term Refinance?

There are many reasons why a rate and term refinance can be a smart financial decision. In most cases, our clients choose to refinance because it saves them money each month on their mortgage payments. You can also use a rate and term refinance to pay off your mortgage sooner, remove mortgage insurance, switch from an adjustable-rate to a fixed-rate, and more!

When Should You Refinance Your Mortgage?

The perfect time to refinance depends on your unique situation, but one strong indicator is the average interest rate for mortgage loans. If you see that the average mortgage rate has dropped from when you purchased your home, then you should consider refinancing. As a service to our clients, JVM Lending monitors interest rates and notifies you whenever there is a refinance opportunity. We advise that if you can lower your interest rate by .5% or more, then a refinance makes sense.

Another factor to keep in mind while considering a refinance is the length of time you plan to own your home. Only refinance if you are planning to stay in the home for at least a few more years. There are closing costs associated with refinances, and if you are planning to sell your home soon, then you may not own the property long enough to reap the benefits and savings of a refinance. In this case, ask us about our no-cost refinances.

Requirements for a Rate and Term Refinance

Requirements for rate and term refinances depend on what type of loan you receive.

Conventional Loans

Conventional loans are the most popular option for refinances, and they are used for loan amounts below the county loan limit. You will need a credit score of 620 and at least 3% equity in your home to refinance with a conventional loan.

Conventional loans are popular for a reason! They are easily accessible, have low interest rates, and do not require mortgage insurance if you have at least 20% equity in your home.

Jumbo Loans

If the outstanding balance on your mortgage is higher than the county loan limit ($647,000 in Texas and $970,000 in high-cost areas of California), then you will need a jumbo loan refinance. Jumbo loans are purchased by individual investors (such as banks and credit unions) instead of government-sponsored entities such as Fannie Mae and Freddie Mac. Specific requirements for jumbo loan refinances will depend on the investor and the loan amount but expect to need a credit score of 720 and 20% home equity for the best products.

FHA Loans

The FHA (Federal Housing Administration) offers rate and term refinances for clients with a credit score of at least 580 and home equity of 97.75%. FHA loans are fantastic for homeowners with a shorter credit history and less equity built up in their home.

If you are refinancing from one FHA loan to another, then you can receive a “Streamline” refinance, which speeds up the process and eliminates the need for an appraisal.

VA Loans

The VA (Veteran Affairs) offers IRRRLs (Interest Rate Reduction Loans) for veterans wanting to lower the interest rate on their VA loan. Although a minimum credit score of 580 is necessary, there is no minimum equity requirement.

Pros & Cons of a Rate and Term Refinance

There are various pros and cons of doing a Rate and Term Refinance, though the pros typically outweigh the cons.

Pros

Lower Interest Rate

Having a lower interest rate will save you money each month on your mortgage payment. Keep in mind that how much money you save will depend on the size of your loan. For example, if you have a $500,000 loan and are refinancing from a 5.5% rate to a 4.5% rate, you will save about $245 per month. If you have a $1,000,000 loan and receive the same interest rate reduction, you will save about $490 per month.

Shorter Loan Term

If you are in the first half of a 30-year mortgage and refinance into a 15-year mortgage, then you will pay off your loan faster. Depending on how much of the loan has already been paid, you may have a higher monthly payment, but you would also own your home sooner, and save in interest over the course of your new loan. This would be a great option if you receive a raise at work and have extra money each month to put into your mortgage payments.

Different Loan Type

A rate and term refinance allows you to switch loan types. If you purchased your home with an FHA loan and have since built up more equity or improved your credit score, then you may be able to refinance into a conventional loan. This would allow you to save money each month by eliminating FHA mortgage insurance.

If you purchased your home with an adjustable-rate mortgage and no longer want the added risk of having a variable interest rate, then you could refinance into a fixed-rate loan, ensuring that your monthly payment won’t change in the future.

Remove Mortgage Insurance

Mortgage insurance on conventional loans automatically falls off when you reach 22% equity through making mortgage payments. However, a rate and term refinance can help accelerate the removal of mortgage insurance if your home value has increased significantly since its purchase.

For example, if you made a lot of renovations that increased your home’s value, then your equity in the home will increase as well. We will need to order an appraisal to ensure that your home value has increased, but this can be a great opportunity to get rid of mortgage insurance faster than expected.

Remove Co-Signer

A common strategy to qualify for more expensive purchases is to add a co-signer to the loan. If you have a loan co-signer on your mortgage, but you are now able to qualify for the loan on your own, then a refinance would allow you to remove the co-signer.

Cons

Closing Costs

One disadvantage of refinancing a home is that you may have to pay closing costs at the refinance closing. This can include charges such as the appraisal fee, title fees, and underwriting fee. When deciding whether to move forward with the refinance, you should consider whether the benefits of the refinance are worth the closing costs.

We always recommend asking about “no-cost” refinances. If you can avoid paying closing costs out-of-pocket, then even an interest rate reduction of .1% would be worth it.

Longer Time until Loan Payoff

If you are refinancing into a loan that has a longer term than what is remaining on your current mortgage, then your loan payoff date will be farther away, and it will take longer to own the property free and clear.

How Does Refinancing Your Mortgage Work?

STEP 1 – Request Your Free Refinance Analysis

Start the refinance process by reaching out to one of JVM Lending’s experts to discuss your goals for the refinance. Let us know how much your home is worth, what your current interest rate is, and how much is still owed on your current loan.

STEP 2 – Review Your Documents

Our team of loan experts will advise on whether the time is right to refinance and what benefits can be explored. You will be instructed to complete a questionnaire and provide your financial documents (such as pay stubs, bank statements, and a copy of your homeowner’s insurance) on our online loan application.

STEP 3 – Lock In Your New Interest Rate

Once your application is received, our team can get started on locking in your interest rate. We are always happy to monitor interest rates for clients, and we will notify you when we see significant improvements. We will wait on your confirmation before locking in your rate.

STEP 4 – Submit Your File To Underwriting

Next, your loan file will be submitted to an underwriter for approval, and you will receive a loan statement breaking down closing costs. During this time, we will also order an appraisal to assess the home’s current value.

STEP 5 – Sign Your Documents & Fund Your New Mortgage Loan

The last step is for you to attend a signing appointment to sign your closing documents, including the Promissory Note with your new loan terms. Most refinances have a three-day waiting period after signing where you can choose to cancel the refinance if you wish. After the waiting period is complete, your loan will fund, and your previous mortgage will be paid-off.

Your first mortgage payment will be due 1 to 2 months after closing. From beginning to end, the refinance process takes about 30 to 45 days to complete.

Does a rate and term refinance make sense for you?

There is no one-size-fits-all for mortgage financing. The best way to determine whether a rate and term refinance makes the most sense for you is to to have one of our mortgage experts at JVM Lending complete a free refinance analysis. Our experts can walk you through monthly payment scenarios, give you current interest rates, and discuss any other questions or concerns you might have.