What is a rate and term refinance?
A rate and term refinance replaces your current mortgage with a new one for about the same balance, without taking cash out. You're changing the interest rate, the loan term, or both. Some people also use it to switch loan types, such as from an adjustable rate to a fixed rate, or from an FHA loan to a conventional loan.
It's different from a cash-out refinance, where you borrow more than you owe and receive the difference in cash.
The break-even point
Refinancing has closing costs, often around 2% to 6% of the loan amount. The break-even point is how long it takes for your monthly savings to cover those costs.
If you expect to move or refinance again before the break-even point, the refinance may cost more than it saves.
When a rate and term refinance can make sense
- Rates have dropped below your current rate by enough to cover the closing costs within the time you'll keep the loan.
- You want to pay off sooner. Moving to a 15- or 20-year term usually raises the payment but can cut total interest significantly.
- You want a predictable payment by moving from an adjustable rate to a fixed rate.
- You want to drop mortgage insurance, for example by moving from an FHA loan to a conventional loan once you have enough equity.
Watch out for resetting the clock
If you're 5 years into a 30-year loan and refinance into a new 30-year loan, you're adding 5 years of payments. Your monthly payment may drop even if your total interest goes up. The calculator shows both the monthly savings and the lifetime cost difference so you can see the trade-off. Choosing a term close to your remaining years keeps the comparison fair.
Ways to lower closing costs
- Compare Loan Estimates from more than one lender. Fees vary more than many people expect.
- Ask about lender credits, which lower upfront costs in exchange for a slightly higher rate.
- Ask about streamline programs if you have an FHA or VA loan. They can reduce paperwork and costs for qualifying borrowers.
Frequently asked questions
How much lower should my rate be to refinance?
There's no single rule. What matters is whether your monthly savings pay back the closing costs before you move or refinance again. Use the break-even line in the calculator.
Does refinancing restart my loan?
Yes, a refinance is a new loan with a new term. You can choose a shorter term so you don't add years of payments.
Does refinancing hurt my credit?
Applying usually involves a credit check, which can cause a small, temporary dip. Shopping several lenders within a short window is generally treated as a single inquiry for scoring.
Can I roll closing costs into the new loan?
Often, yes. It reduces what you pay upfront but increases your loan balance and the interest you pay over time. Switch the setting in the calculator to compare.
What's the difference between rate and term and cash-out refinancing?
A rate and term refinance keeps your balance about the same and changes the rate or term. A cash-out refinance increases your balance and pays you the difference in cash.
About this calculator
This calculator uses standard loan formulas and the numbers you enter. It runs in your browser, doesn't check your credit and doesn't save anything unless you choose to request options. Results are estimates for education only. Lenders set their own limits, rates and fees.
For independent guidance, see the Consumer Financial Protection Bureau's homebuying resources.