Rate/Term - No Cash Out Refinance
What is a Rate/Term or No Cash-Out Refinance?
A Rate/Term Refi is the most common type of refinance. In a Rate/Term refinance you replace the existing mortgage on a property with a new one- typically to lower your interest rate. No other debts are paid off, and cash-out is not permitted. Since you are simply replacing a mortgage that you have already been making payments on, this is considered the lowest risk of the 3 types of refinances and therefore will typically have lower interest rates than equivalent cash-out or debt consolidation refinances and follow similar Loan-To-Value requirements to purchase transactions. The information provided below is for standard Conventional, FHA and VA programs. Jumbo and Portfolio loans may have slightly different guidelines.
What are the Most Common Purposes of a Rate/Term Refinance?
Lower Your Interest Rate & Monthly Payment.
Change the term or the mortgage.
Ie. from a 30 year fixed to 15 year fixed mortgage.
- Move from an Adjustable Rate Mortgage to a Fixed Rate Mortgage.
Adjustable Rate Mortgages are considered higher risk because over time your interest rate can adjust to a higher rate. ARMs pose a challenge because as the interest changes, the monthly payment will also change & if the interest rate were to increase allot you could end up with a mortgage payment you can’t afford. For this reason, many people will refinance out of an ARM and into a lower risk fixed rate mortgage with a stable monthly payment over the life of the loan.
Do I Have to Bring any Money to Closing in a Rate/Term Refinance?
No, typically closing costs are rolled into the new mortgage when you refinance your existing mortgage. Some people prefer not to increase the loan balance on the new mortgage and elect to leave the loan balance the same and bring cash to closing to cover the closing costs.
What is a no Closing Cost Rate/Term Refinance?
A no closing cost rate/term refinance is when the lender gives a credit at closing to offset the closing costs of the refinance. In a no closing cost refinance, the borrower will agree to take a higher interest rate in exchange for this lender credit. The lender will make up over the course of the loan through the collection of higher interest associated with the increased rate. Eliminating closing costs, while costing the borrower more money over the life of the loan, ensures that there is an immediate benefit to the refinance if the interest rate is lowered over the original loan. No closing cost refinances are particularly popular in situations where the plan is to sell the property or pay off the loan in a few years. As there are no closing costs to recoup, the refinance leads to immediate savings.
Can I pay off a Second Mortgage as Part of a Rate/Term Refinance?
A first and second mortgage can be paid off as part of a rate/term refinance as long as both loans were taken out simultaneously at the time of purchase. If the second mortgage was added anytime after closing (a typical example of this would be a HELOC), then the transaction would be considered a cash-out refi & you may have to pay a higher interest rate or be subject to lower a loan-to-value limit. A common mistake made by inexperienced loan officers is not to check to make sure that the first and second mortgages were taken out simultaneously when advising prospective borrowers to refinance.
Can I pay off a HELOC as part of a Rate/Term Refinance?
HELOCs can be paid off as part of a rate/term refinance as long as the HELOC was opened simultaneously with the first mortgage. There is commonly one additional requirement when refinancing a HELOC as a Rate/Term Refinance. Most loan types will require that the HELOC not have any draws made on it for the 12 months preceding the refinance to qualify as a rate/term refinance.
Can I pay Down my Current Loan Balance as Part of a Rate/Term Refinance?
It is allowable to pay down the loan balance so the new mortgage has a lower balance than the existing loan as part of a Rate/Term Refinance. This is common when you need to attain a specific loan to value (ie. 80% or less so the new loan does not have mortgage insurance).Qualified gifts are permitted from Family Members and Employers depending on the type of loan program you are refinancing into.