Are you looking to take advantage of lower rates in today’s market or adjust your term length?

Borrowers in either of these situations can apply for a rate-and-term refinance which allows the homeowner to replace their existing home loan with a new loan that better suits their current financial situation.

In our complete guide to rate-and-term refinancing, we’ll take a look at how rate-and-term refinancing works and the ideal borrower scenarios.

What is a rate-and-term refinance?

The goal of a rate-and-term refinance is to adjust the terms and conditions of your existing home loan without changing the overall loan amount.

Borrowers can use a rate-and-term refinance for the following purposes:

• To adjust their interest rate to reduce monthly payments and save on interest over the life of the loan
• To shorten the loan term (or duration) by repaying the loan in less time
• To lengthen the loan term in order to lower monthly payments

Cash-out refinancing is another popular type of refinancing that allows homeowners to adjust their loan terms and conditions while at the same time tapping into home equity.

A cash-out refinance involves replacing your current mortgage with a new, larger mortgage. The difference between the two loan amounts is distributed to the homeowner in cash.

Rate-and-term refinancing focuses on long-term savings. It’s an ideal solution for borrowers who want to optimize their current loan without increasing their debt load.

Why homeowners choose rate-and-term refinancing

Rate-and-term refinancing allows homeowners to adapt the provisions of a mortgage to fit their current life circumstances or future financial goals.

Let’s look at the reasons homeowners may choose rate-and-term refinancing.

Improve their credit score

Excellent credit scores can unlock more favorable interest rates and terms.

If a borrower has significantly improved their credit score, they may consider a rate-and-term refinance to secure a lower interest rate.

Deal with life changes or significant life events

Homeowners who get a salary increase or a higher-paying job may decide to pay off their mortgage loan earlier and refinance to shorten their loan term.

Alternatively, a borrower may be going through a significant life event, such as a divorce, and need to refinance to remove their ex-spouse from the mortgage and adjust their terms and conditions.

Both of these types of homeowners can use a rate-and-term refinance to achieve their new financial goals.

Change from an adjustable-rate mortgage to a fixed-rate mortgage

Borrowers who opt for an adjustable-rate mortgage (ARM) often refinance to a fixed-rate mortgage loan (FRM) once the ARM’s initial fixed-rate period ends.

A rate-and-term refinance can help the borrower secure a fixed rate for consistent payments over the remainder of the loan term.

Eliminate private mortgage insurance

Homeowners who initially put down less than 20% on their homes are required to pay private mortgage insurance (PMI).

Once the homeowner builds enough equity in the home or the home’s value appreciates, a rate-and-term refinance can eliminate PMI and reduce monthly costs.

Take advantage of a decline in interest rates

When interest rates drop over time, homeowners often refinance their mortgages to secure a lower rate.

A rate-and-term refinance allows borrowers to pay less interest over the life of the loan.

Benefits of a rate-and-term refinance

Is a rate-and-term refinance right for you?

Here’s a snapshot of the key benefits to help you determine your options at a glance:

• Significant interest savings over the life of the loan
• Lower monthly payments
• Improved financial stability
• PMI elimination
• Increased cash flow

Rate-and-term financing offers borrowers flexibility and allows them to take control of their financial health.

How much could you save? A rate-and-term refinance example

Near the end of October 2023, interest rates averaged 7.79%. In November 2024, interest rates averaged 6.79%—a full percentage point lower than the previous October.

If a homeowner purchased a $400,000 home in October 2023 at a 7.79% rate, they would pay an estimated $2,877 monthly, not including taxes and fees.

If the same homeowner refinanced in November 2024, they would pay an estimated $2,605 monthly for a savings of $272.

How to get a rate-and-term refinance

Homeowners interested in getting a rate-and-term refinance must apply with a mortgage lender.

Let’s look at the eligibility requirements and application process for borrowers who work with Compass Mortgage.

Refinance eligibility requirements

• Acceptable credit score
• Debt-to-income ratio (DTI) within industry guidelines
• Employment verification and history
• A loan-to-value ratio (LTV) of 80% or less (meaning you have at least 20% equity in your home)

Application process

When you apply for a rate-and-term refinance with Compass Mortgage, we will evaluate the following information:

• Current interest rate
• Credit score
• Home’s current market value
• Equity in the home
• Reason for refinancing

The Compass Mortgage team will explain your options to determine what will benefit you most, discuss your potential terms and guide you through each step of the process.

Homeowner refinance considerations: The break-even point

Refinancing doesn’t make sense for every borrower.

One of the most important rate-and-term refinance considerations for homeowners is the break-even point.

The break-even point is when a homeowner recoups the costs of refinancing through the savings generated by the new loan.

For example, let’s say your closing costs total $6,000 for a refinance that reduces your monthly payments by $272.

• Break-Even Point = Total Closing Costs / Monthly Savings
• Break-Even Point = $6,000 / $272
• Break-Even Point = 22.1 months

To recover the costs of refinancing, the homeowner would need to stay in the home for at least 22.1 months.

Not all borrowers intend to remain in their homes long enough to recoup the costs. Homeowners should weigh the immediate expenses of refinancing against the long-term savings.

Apply for a rate-and-term refinance with Compass Mortgage

Ready to access lower monthly payments and more favorable terms?

Connect with Compass Mortgage. We allow our borrowers to lock in current rates and streamline closings with our distinctive Get Committed® program.

Have questions or concerns? Call (877) 932-8221 now. Our experienced team is waiting to help you with the next steps!