Glossary

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Rate and Term Refinancing

A refinancing option in which the principal of the mortgage remains the same and only the interest rate and term are adjusted.

Rate and term refinancing changes the terms of a mortgage without adding any new money to the loan. This differs from cash-out refinancing, which refinances to a mortgage with a larger principal and pays cash back to the borrower. Rate and term refinancing does not change the amount of principal. It only changes the interest rate and/or the length of the loan.

There are several good reasons to consider rate and term refinancing. Perhaps interest rates have significantly dropped since you originally got your mortgage. You can refinance and get a better rate, which will save you money on your monthly payments.

Perhaps you have a 15-year fixed-rate mortgage but need lower monthly payments. You can use rate and term refinancing to turn your loan into a 30-year fixed-rate mortgage. This can also work for the opposite scenario. If you want to build equity more quickly, you can change from a 30-year fixed loan to a 15-year fixed, but remember this will result in a higher monthly payment -- although more of your monthly payment will go to principal. This difference is due to the long-term savings in interest of the 15-year product.

Look at the difference in payment with the products, but also compare the total amount paid.

 Term  Interest Rate  Loan Amount  Monthly Payment  Total Paid on Loan
 15-year fixed  6%  $160,000  $1,350.17  $243,030.83
 30-year fixed  7%  $160,000  $1,064.48  $383,217.48

If you choose rate and term refinancing, you can save some money up front by rolling in your closing costs. Although you do not get cash back with rate and term refinancing, you can receive up to 1 percent of the loan amount in cash at closing. If you are considering rate and term refinancing, be sure to talk with your lender or financial advisor to see if it is right for you.

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