Lower Your Rate
Reducing your interest rate can save you a lot of money in the long term while also lowering your monthly payment.
Shorten Your Loan Term
Shortening your loan term allows you to speed up the rate at which you build equity. That means saying goodbye to years of payments!
Lower Monthly Payments
Who doesn’t want a lower monthly payment? Lowering your payment can save you thousands over the life of your loan.
What Is a Rate-and-Term Refinance?
Rate-and-term refinances are the most common refinances today. They allow homeowners to change their existing mortgage rate, loan term, or both.
For example, if you’re refinancing from a 30-year mortgage with a 5% interest rate to a 30-year mortgage with a 3% interest rate, you’ll end up with lower monthly payments, allowing you to save money (or put additional money towards the principal each month).
Meanwhile, refinancing from a 30-year mortgage to a 15-year loan will eliminate years of payments and reduce the interest over the life of the loan, even though monthly payments may go up (unless there’s also a significant reduction in the interest rate). For these reasons, a rate-and-term refinance is a great option for many homeowners with newer mortgages.
There are some factors to be aware of to prepare for a rate-and-term refinance:
- A rate-and-term refinance replaces your original mortgage with a new one.
- Your interest rate, monthly payments, and term length will change.
- You’ll need a certain credit score, debt-to-income ratio, and amount in equity to qualify.
- A rate-and-term refinance is referred to as a “no-cash-out refinance,” so you can’t use a rate-and-term refinance to tap into your home equity.
- Multiple types of mortgages qualify for a rate-and-term refinance, including conventional, FHA, VA, and USDA loans.
What Advantages Does a Rate-and-Term Refinance Offer?
There is a reason a rate-and-term refinance is appealing to many homeowners with newer mortgages.
Keep in mind that you should still be financially prepared to handle closing costs and the appraisal fee that come with a refinance. Talk to your lender if you have any questions or concerns about refinancing into a rate-and-term refinance option.
Let’s take a look at some of the advantages offered by a rate-and-term refinance:
Lower interest rates.
Refinance rates are near historic lows these days, so you could lock in a lower rate than what you’re currently paying, potentially saving thousands or even tens of thousands over the life of a mortgage.
Lower monthly payments.
A lower rate could result in a lower monthly payment. Refinancing into a longer term will drop payments even more significantly. But keep in mind that means it will also take longer to pay off the home.
Pay off your home early.
By refinancing from a newer 30-year mortgage to a 15-year loan, homeowners will own their home outright sooner by making higher monthly payments. Even with higher payments each month, paying off a mortgage loan faster saves on paying the cost of interest rates on the principal of the house in the long run.
Bye, bye, PMI!
Typically, when homeowners can’t put a 20% down payment into a new home, they’re required to obtain private mortgage insurance (PMI) to offset the risk of the loan issued by a private lender. If your home has gained value since you bought it, refinancing may reveal that you have more equity in your home than previously thought, and you could be able to cancel the PMI.
What Steps Should Homeowners Take to Apply for a Rate-and-Term Refinance?
Rate-and-term refinances are generally easier to qualify for than cash-out refinances because the equity requirements are less stringent. Consult with your lender about home equity, minimum credit score, and maximum DTI requirements. Then, take the steps below to prepare for the process:
1. Gather documents
First, prepare by gathering the following documents:
- Two most recent pay stubs
- Two most recent bank statements
- Two most recent W-2s
Once your paperwork is ready to submit as part of your application, your lender will begin the underwriting process. Be aware of lender inquiries to help keep the refinancing process on track.
Additionally, you will receive a document from your lender called a Loan Estimate after you apply for your refinance. This document shows an estimate of the fees and costs to expect on the refinance loan. Keep this document in a safe place, as you’ll need it later on to compare to your Closing Disclosure.
2. Lock in Your Rate
You’ll want to protect yourself from changing interest rates by locking in your mortgage rate. When a mortgage rate is locked in, you won’t be affected by changing interest rates that occur between the refinance application submission and closing date. Most homeowners generally have 30–60 days at a guaranteed, locked-in rate on their mortgage. For an additional fee, it is usually possible to extend the rate lock.
3. Seek an Appraisal
The next step will be to get an appraisal to determine the home’s value. This is used to reassure the lender of the equity value available from a house. It is in your best interest to make sure the house is in top condition before the appraisal occurs! And homeowners are allowed (and encouraged) to be present or on hand during the appraisal.
4. Review Closing Disclosure and Close Your Loan
Three business days before the closing, the lender will provide you with a list of all the charges and credits to be paid by the buyer and seller in the Closing Disclosure. Keep this document on hand as well in case of any discrepancies in the loan terms, projected monthly payments, and closing costs.
Once your lender finishes the underwriting (and after carefully reviewing the Closing Disclosure), a final closing meeting will be scheduled. This is an opportunity to ask any last-minute questions about the new loan and to sign all of the necessary paperwork. Be sure to bring along a photo ID, Closing Disclosure, and a proof of transfer or a cashier’s check for closing costs. A neutral third party will be appointed by your lender to conduct the closing and finalize the rate-and-term refinance loan.
How Can The Schutze Team Help?
At The Schutze Team, we understand that everyone’s mortgage situation is different. Our team of lending experts is highly-trained to help homeowners refinance their mortgages and receive the best possible terms. Our staff is a reflection of the communities we serve and are pros at navigating the best refinancing programs available to homeowners.
So give us a call today speak with an experienced lending representative. You can also fill out an application to get a preapproval in as little as five minutes to speak with one of our team members right away.