What Is Rate-and-Term Refinance?
A rate-and-term refinance adjusts your mortgage rate or amortization term without increasing the loan amount. Unlike a cash-out refinance, you don't receive any cash—the new loan pays off the old one, and the balance stays the same (or slightly lower if you've been paying principal). Investors use it when interest rates drop to lower monthly payments or shorten the payoff timeline.
A rate-and-term refinance replaces your existing mortgage with a new one that changes the interest rate or loan term—but not the principal balance—and does not provide cash to the borrower.
At a Glance
- What it is: A refinance that changes rate or term only; loan amount stays the same or decreases.
- Why it matters: Can lower monthly payments, reduce total interest, or shorten payoff—without tapping equity.
- Key detail: No cash to borrower; new loan pays off old loan at or near current balance.
- Related: Refinance, cash-out refinance, interest rates, mortgage.
- Watch for: Closing costs; run breakeven refinance math to ensure savings justify the cost.
How It Works
Rate change: The most common use. You refinance from a higher rate to a lower rate. Example: 7% to 5.5% on a $250,000 balance. Monthly payment drops; total interest over the life of the loan decreases.
Term change: You might shorten the term (e.g., 30-year to 15-year) to pay off faster, or extend it to lower payments. Extending the term reduces monthly payment but increases total interest paid.
No cash out: The new loan amount equals (or is less than) the payoff balance. Lenders treat this differently from cash-out—often with lower fees and simpler underwriting, since you're not increasing leverage.
Breakeven: Closing costs typically run 2–4% of the loan amount. You need to save enough in monthly payments to recoup those costs within a reasonable timeframe (often 2–4 years).
Real-World Example
David has a $280,000 balance on a 30-year mortgage at 7.25%. His monthly payment is $1,910. Rates drop to 5.75%. He does a rate-and-term refinance. His new payment is $1,634—a $276/month savings. Closing costs are $8,400. His breakeven is 31 months ($8,400 ÷ $276). He plans to hold the property 10+ years, so the refinance makes sense. Over 10 years, he saves $33,120 in payments minus $8,400 in costs—net savings of $24,720.
Pros & Cons
- Lower monthly payments when rates drop.
- Reduce total interest paid over the life of the loan.
- Simpler than cash-out—often lower fees and faster approval.
- Can shorten term to pay off faster without increasing payment.
- Closing costs eat into savings—must run breakeven math.
- Resets the amortization clock if you extend the term.
- In a rising-rate environment, refinancing may not make sense.
- Some lenders charge prepayment penalties on the old loan.
Watch Out
- Breakeven risk: If you sell or refinance again before breakeven, you lose money. Only refinance if you expect to hold long enough.
- Rate environment risk: Locking in a new rate when rates are volatile can backfire if they drop further.
- Cost creep: Points, appraisal, title—ensure all costs are included in your breakeven calculation.
Ask an Investor
The Takeaway
A rate-and-term refinance is a tool to optimize your existing mortgage—lower payments, less interest, or faster payoff—without tapping equity. Run the breakeven math before refinancing; only do it if you'll hold long enough to recoup closing costs.