A rate and term refinance replaces your existing mortgage with a new loan that has different terms—typically a lower interest rate, a different loan duration, or both. Unlike a cash-out refinance, you're not taking out additional money; you're simply restructuring your current mortgage to better meet your financial goals and take advantage of more favorable conditions.
Why Refinance Your Mortgage?
Refinancing can be a powerful financial tool when the timing and circumstances are right. Many homeowners refinance to reduce their monthly costs, save thousands in interest over the life of the loan, or accelerate their path to being mortgage-free.
Lower Your Interest Rate
Even a small reduction in your interest rate can translate to significant savings. If market rates have dropped since you purchased your home—or if your credit has improved—refinancing can lock in a lower rate and reduce the amount you pay in interest over time.
Shorten Your Loan Term
If your financial situation has improved since you bought your home, you might consider refinancing from a 30-year mortgage to a 15-year or 20-year term. This means you'll pay off your home faster and save substantially on total interest paid, though your monthly payment may increase.
Switch from Adjustable to Fixed Rate
If you currently have an adjustable-rate mortgage (ARM) and want payment stability, refinancing to a fixed-rate mortgage locks in your rate for the life of the loan. This protects you from future rate increases and provides predictable monthly payments.
Eliminate Private Mortgage Insurance
If you put down less than 20% when you bought your home, you're likely paying PMI. If your home value has increased or you've paid down enough principal to reach 20% equity, refinancing can eliminate PMI and lower your monthly payment.
When Rate and Term Refinancing Makes Sense
Timing is critical when it comes to refinancing. Here are the scenarios where a rate and term refinance typically offers the most value:
Interest Rates Have Dropped
The general rule of thumb is that refinancing makes sense when you can reduce your rate by at least 0.5% to 1%. However, even smaller reductions can be worthwhile depending on your loan amount and how long you plan to stay in the home.
Your Credit Has Improved
If your credit score has increased significantly since you took out your original mortgage—perhaps you've paid down debt, resolved issues, or simply built a stronger payment history—you may now qualify for much better rates.
Your ARM Is About to Adjust
If you have an adjustable-rate mortgage and the initial fixed period is ending, your rate could increase substantially. Refinancing to a fixed-rate mortgage before the adjustment can provide stability and potentially save money.
You Want to Change Your Loan Term
Whether you want to pay off your mortgage faster by shortening the term, or reduce monthly payments by extending it, refinancing gives you the flexibility to align your mortgage with your current financial goals.
You've Built Sufficient Equity
If your home has appreciated in value or you've paid down a significant portion of your mortgage, you may have the equity needed to qualify for better loan terms and eliminate mortgage insurance.
Key Benefits of Rate and Term Refinancing
Refinancing your mortgage offers several tangible financial advantages when structured properly:
Lower Monthly Payments
By securing a lower interest rate or extending your loan term, you can reduce your monthly mortgage payment. This frees up cash flow for other financial goals like saving, investing, or paying down high-interest debt.
Significant Interest Savings
A lower interest rate means more of your payment goes toward principal rather than interest. Over the life of a 30-year loan, even a 1% rate reduction can save tens of thousands of dollars.
Pay Off Your Mortgage Faster
Refinancing to a shorter term—such as moving from a 30-year to a 15-year mortgage—allows you to build equity more quickly and own your home outright years sooner, while paying substantially less in total interest.
Predictable Payments
Switching from an ARM to a fixed-rate mortgage eliminates the uncertainty of future rate adjustments. You'll have a consistent payment for the life of the loan, making budgeting easier and protecting you from rising rates.
Improved Loan Features
Refinancing gives you the opportunity to move away from loans with prepayment penalties, balloon payments, or other unfavorable terms. You can secure a mortgage that better aligns with your financial strategy.
Costs to Consider
While refinancing can save you money, it's important to understand the upfront costs involved and ensure the long-term benefits outweigh these expenses.
Closing Costs
Just like when you purchased your home, refinancing comes with closing costs. These typically range from 2% to 5% of the loan amount and may include:
- Appraisal fee
- Title search and insurance
- Origination fees
- Credit report fees
- Recording fees
- Attorney fees (in some states)
Calculate Your Break-Even Point
Your break-even point is when your monthly savings equal the amount you paid in closing costs. For example, if your closing costs are $6,000 and you save $200 per month, you'll break even in 30 months. If you plan to stay in your home longer than this period, refinancing makes financial sense.
Consider No-Closing-Cost Options
Some lenders offer no-closing-cost refinances, where the costs are rolled into the loan amount or offset by a slightly higher interest rate. This can make sense if you don't have cash on hand or plan to sell or refinance again in the near future.
Refinancing Requirements
Lenders will evaluate several factors when you apply to refinance your mortgage. Here's what you'll typically need to qualify:
Credit Score Matters
Most conventional refinances require a credit score of at least 620, though you'll get the best rates with a score of 740 or higher. If your credit has improved since your original loan, you're in a strong position to get better terms.
Home Equity Is Key
Lenders typically require you to maintain at least 20% equity in your home after refinancing. This is calculated using your home's current appraised value minus your outstanding mortgage balance. More equity often translates to better rates and terms.
Debt-to-Income Ratio
Your debt-to-income (DTI) ratio—your monthly debt payments divided by your gross monthly income—should generally be below 43% to 50%, though some programs allow higher ratios. A lower DTI improves your chances of approval and better rates.
Employment and Income Verification
Lenders will verify your employment history and current income. Typically, they look for at least two years of stable employment, though self-employed borrowers may need to provide additional documentation.
Property Must Appraise
Your home will need to appraise for enough to support the loan-to-value ratio the lender requires. If the appraisal comes in low, you may need to bring cash to closing or reconsider the refinance.
Requirements at a Glance
While specific requirements vary by lender and loan program, here are the typical guidelines for rate and term refinancing:
| Requirement | Typical Guidelines |
|---|---|
| Credit Score | 620 minimum (740+ for best rates) |
| Home Equity | 20% minimum (80% LTV or lower) |
| Debt-to-Income Ratio | Generally 43-50% maximum |
| Employment | Stable 2-year history preferred |
| Property Type | Primary residence, second home, or investment property |
| Appraisal | Required to determine current value |
The CNA Equity Refinance Advantage
At CNA Equity Group, we've helped thousands of homeowners save money through strategic refinancing over our 24+ years in the mortgage industry. We understand that every borrower's situation is unique, and we take the time to analyze whether refinancing makes financial sense for you.
When you work with us, you benefit from:
- Personalized rate and term analysis to determine your potential savings
- Access to multiple lenders to secure the most competitive rates
- Expert guidance on timing your refinance for maximum benefit
- Transparent cost breakdowns so you understand your break-even point
- Streamlined process from application to closing
We don't just process loans—we help you make informed decisions that support your long-term financial goals.
Ready to Save Money on Your Mortgage?
If you're considering refinancing, now is the time to explore your options. Let us provide a no-obligation analysis of your current mortgage and show you exactly how much you could save with a rate and term refinance.
Call us at (925) 244-1505 to speak with a refinance specialist, or click below to get started with your application today.