Rate & Term Refinance: What You Need to Know

Refinancing a mortgage can be a strategic financial move, especially when interest rates drop or financial circumstances change. One of the most common refinancing options is the rate and term refinance. This guide will cover what it is, how it works, and why it may be beneficial for homeowners in Denver.

What is a Rate & Term Refinance?

A rate and term refinance involves replacing an existing mortgage with a new one that has a different interest rate, loan term, or both. Unlike a cash-out refinance, it does not involve taking equity out of the home. Common reasons for pursuing a rate and term refinance include lowering the interest rate, converting from an adjustable-rate mortgage (ARM) to a fixed-rate loan, or shortening the loan term to build equity faster.

Key Differences Between Rate & Term and Cash-Out Refinance

Cash-Out Refinance: Allows homeowners to take cash from their home equity, typically at a higher interest rate.
Rate & Term Refinance: Focuses solely on modifying the interest rate and/or loan term without extracting equity.

Eligibility Requirements

Before proceeding with a rate and term refinance, it is essential to understand the qualification criteria. Each loan type has specific requirements based on credit score, loan-to-value (LTV) ratio, and debt-to-income (DTI) ratio.

Credit Score Requirements

FHA Loans: Minimum score of 580
USDA Loans: Minimum score of 600 for manual underwriting
Conventional Loans: Minimum score of 620

Loan-to-Value Ratios (LTV)

FHA: Up to 97.75% LTV
USDA: Up to 100% LTV for eligible properties
Conventional: Generally up to 80% LTV

Debt-to-Income Ratios

FHA: Typically up to 50% DTI
USDA: Up to 41% DTI for manual underwriting
Conventional: Varies but often capped at 43%

Types of Rate & Term Refinance Programs

FHA Rate & Term Refinance

This option is ideal for existing FHA loan borrowers looking to reduce their interest rate or adjust their loan term. Borrowers can refinance up to 97.75% LTV, making it a viable choice for those with limited equity.

USDA Rate & Term Refinance

For rural homeowners, USDA loans provide a 100% LTV refinance option. The program is only available for existing USDA loans and requires adherence to USDA guidelines, including property eligibility and income limits.

Conventional Rate & Term Refinance

Conventional loans are a good fit for borrowers with strong credit profiles seeking lower rates or shorter terms. Options include both fixed-rate and adjustable-rate loans, with more flexible terms than FHA or USDA programs.

Costs and Fees Associated with Rate & Term Refinance

Refinancing a mortgage is not free. Homeowners should be aware of associated costs such as:

Closing Costs: Appraisal, title search, recording fees
Prepayment Penalties: Applicable in some cases
Escrow Fees: Funding for property taxes and insurance

To assess the financial viability of a refinance, calculate the break-even point by dividing the total costs by the monthly savings. If the break-even period aligns with the homeowner’s financial goals, a refinance may be worthwhile.

Potential Benefits of Rate & Term Refinance

Lower Interest Rates: Reducing the interest rate can lead to substantial savings over the life of the loan.
Stable Monthly Payments: Converting an ARM to a fixed-rate loan provides payment stability.
Shorter Loan Term: Reducing the loan term can build equity faster and reduce overall interest paid.

Risks and Considerations

While rate and term refinancing offers benefits, there are risks to consider:

Potentially Higher Total Interest: Extending the loan term may reduce monthly payments but increase overall interest.
Closing Costs: Fees can add up and diminish savings.
Loan Reset: Re-amortizing the loan may extend the repayment period.

Step-by-Step Guide to the Rate & Term Refinance Process

Assess Financial Goals: Determine whether lowering payments or shortening the term is the priority.
Compare Loan Options: Evaluate FHA, USDA, and conventional refinance options.
Gather Documents: Income verification, credit report, and asset statements.
Apply for Refinance: Submit an application with the chosen lender.
Underwriting and Appraisal: Complete the appraisal and underwriting process.
Closing and Funding: Review and sign final documents to complete the refinance.

How Miranda Mortgage Can Assist with Your Refinance

At Miranda Mortgage, we specialize in guiding Denver homeowners through the refinance process. Whether you aim to lower your interest rate, adjust your loan term, or switch from an ARM to a fixed rate, our team provides personalized guidance and tailored loan options to fit your financial goals.