The Benefits of Rate and Term Refinancing: A Guide to Lowering Your Mortgage Costs

The benefits of rate and term refinancing; a guide to lowering your mortgage costs is here to help you reduce monthly mortgage payments.

The Benefits of Rate and Term Refinancing: A Guide to Lowering Your Mortgage Costs
What is rate and term refinancing

Monthly mortgage costs can be the biggest expense for many. Homeowners should definitely consider refinancing options to help lower interest rates and monthly payments.

Here are some rate and term refinance guidelines to help you make an informed decision.

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What Is Rate and Term Refinance?

Rate and term refinancing loans are a mortgage that results in lower loan terms or interests; you may even be able to get both! It is different from a cash-out refinance since you will get no upfront money to use as you please.

Cash-out refinancing loans are when the equity of the home is exchanged for cash. The money you receive is added to your loan balance.

How Does Rate and Term Refinance Work?

When the market experiences lower interest rates, a lot of homebuyers start to apply for rate and term refinance loans to get lower monthly payments.

Conversely, cash-out refinancing options are better for people whose homes have increased in value and they want to tap into the home equity.

Rate and Term Refinance Requirements

Lower interest rates are needed to make rate and term refinance work. You should make sure that you apply at the right time since interest rates can also go up while you are applying.

However, you can also look at your credit score and debt-to-income ratio for the loan. If your credit score has recently increased or your DTI has fallen, it can help you get better loan terms.

Benefits of Rate and Term Refinance

There are several benefits of applying for rate and term refinance options.

Here are some of them now.

Lower Monthly Payments and Interest Rates

Rate and term refinance is only viable when the interest rates in your area have fallen. You could save thousands over the life of the loan since you will pay less interest. It also means that your monthly mortgage payments will fall.

For example, you have a 30-year mortgage at a fixed rate that you got 10 years ago. You had a 4.5% interest rate on a $200,000 loan. This means you are paying $1,013 monthly. With refinancing, you are able to get a new loan at a 3.25% rate. It can reduce your total monthly payments by $140, which definitely adds up for the remaining 20 years.

Reduce Life of Loan

Since you can change the terms of the loan, you can reduce how long you have to make payments. If you have been making payments for a few years, you can take advantage of reduced interest rates to decrease the loan terms. Going from a 30-year to a 20-year plan without changes in the monthly payments means that you will be done quicker!

Plus, you will have to pay less interest overall since you’re paying off the loan in a shorter time span.

Change to Fixed Interest Rate

If you have an adjustable rate mortgage (ARM), you can use rate and term refinance to switch to one with a fixed rate. It can help you plan your finances in a much better way since you know how much you have to pay every month.

Apply for refinance before an interest rate adjustment period is coming so that you can get a fixed rate for the coming months.

Get Funds for Home Repairs or Improvements

When you make mortgage payments, you are building home equity. If the value of your property has suddenly increased and you have up to 80% equity, you can try cash-out refinance options. You can make improvements or renovate your home to further build property value.

Remove Mortgage Insurance

As a borrower, you have to pay the Private Mortgage Insurance (PMI) if you got a loan for over 80% of the home’s value -unless you have opted for VA loans.

Refinancing the mortgage can be a chance to remove the monthly and annual insurance premium payments. It can result in improved monthly costs.

The option works for people whose LTV is less than 80% due to increases in home value or decreases in loan amounts.

How to Lower Your Mortgage Costs?

Since the goal is to get monthly mortgage savings, here are some alternatives to rate and term refinance that you can also consider.

Loan Recast

A loan recast only works for conventional loans. You can decrease the monthly payments and keep the same terms and rate by recasting the loan. There are a few fees attached to recasting though.

Then, you need to make a lump-sum one-time payment towards the loan balance. The lender will write off this amount from your balance. Any remaining payments you have left will be calculated based on the new loan balance.

Essentially, it means that your new monthly payment will go down.

Remove Private Mortgage Insurance (PMI)

You don’t need to apply for refinancing to remove the PMI payments. For conventional loans, you need to pay the PMI if you made a down payment of less than 20%. It is a necessary step for lenders since it protects them against loss.

When you reach 20% home equity, you can apply to remove the PMI and your costs will immediately go down. You can also get the PMI removed if your home’s value has increased, so your loan balance is 80% of the original home’s value.

Also, you should note that the PMI will automatically be removed once you reach 22% home equity even if you don’t request it. But why should you pay extra until you reach that extra 2% equity? Do make sure to send in a request when you have reached 20%

PMI rates are 0.5-1% of the total loan amount. For example, if you took a loan of $230,000, you have to pay $1,150-$2,300 yearly for your PMI.

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Extend Loan Terms

You can also decrease your monthly mortgage payments by extending the terms of the loan through your rate and term refinance. A longer mortgage term can spread your principal balance over more time. Of course, this means you will have to pay extra in interest over the loan’s lifespan.

Rent Out Your Home

If you have some extra space, a basement, or a spare bedroom, you can rent it out to someone. It can help you earn extra cash and add it to the cost of your mortgage.

Try Another Homeowners Insurance Plan

To get a mortgage, you need homeowners’ insurance. Try shopping around for better insurance deals to lower your monthly payments.

Conclusion

We hope these rate and term refinance guidelines helped! Do make sure to go over the closing costs of your refinance carefully so that you make meaningful savings every month. You can also talk to your lender to figure out your next steps.