In the world of mortgages, to refinance means to replace your current mortgage with a new one. This refinance loan will have a different interest rate, preferably lower, as well as new term. Your current mortgage will be repaid by taking out the refinance loan and your existing mortgage balance will be transferred to your new mortgage.
Rate and Term Mortgage Refinance
The most straightforward mortgage refinance loan is the “rate and term mortgage refinance.” According to a mortgage refinance specialist in Salt Lake City, with this mortgage plan, you will be changing your interest rate, loan term, and maybe the loan plan, but you can’t change your mortgage amount. This is also commonly referred to as a “no cash-out refinance.”
In general, borrowers usually take out a rate and term mortgage refinance if their existing loan is an ARM or adjustable rate mortgage and the expiration of their loan term is coming up. Borrowers likewise consider rate and term refinancing when they see mortgage rates dropping consistently and considerably since the time they took out their original mortgage.
A great example is an ARM with a three-year term, where you pay a fixed rate for the initial three years. Once your three years are up, however, you’ll have to pay an adjustable rate according to the index and margin tied to your mortgage. Prior to or during the first adjustment period, borrowers usually consider refinancing so that they won’t have to pay the whole indexed rate, but only if this rate is higher than their original, fixed rate.
Considerations for Rate and Term Refinance
Know that you have the option of refinancing your current mortgage with your current lender or looking around for other mortgage programs and rates with different lenders, banks, or brokers. Just do your homework to get the best refinance deal that fits your financial situation.
Additionally, yes, you’ll still have to pay closing costs for your refinance loan, but the savings you get every month will, over time, cover the closing costs. This is the main reason many borrowers go for a rate and term mortgage refinance. On the other hand, if you plan on staying in your house for just one or two years, it wouldn’t make sense to refinance since you wouldn’t be able to recover those costs. That said, look ahead and do your math to make certain that a refinance is right for you.