A rate-and-term refinance changes your loan's rate, term, or structure without increasing the balance. It is the simpler of the two refinance types and generally carries more favorable requirements.
These questions cover when it makes sense.
Quick answer
A rate-and-term refinance replaces your loan at approximately the same balance, changing rate, term, or structure. It typically allows higher leverage, lower reserves, and lighter seasoning than a cash-out refinance.
Frequently Asked Questions
What is a rate-and-term refinance?
Replacing your existing loan with a new one at roughly the same balance, to change the interest rate, loan term, or structure without extracting equity.
How is it different from cash-out?
You do not receive proceeds. The new loan pays off the old one plus closing costs, without increasing your leverage meaningfully.
Can I roll closing costs into the loan?
Often yes, within limits. Small increases to cover costs generally still qualify as rate-and-term rather than cash-out, though thresholds vary by lender.
What is the incidental cash limit?
Many lenders allow a small amount of cash back — often a few thousand dollars — before reclassifying the transaction as cash-out. Confirm the specific threshold.
Why does the classification matter?
Because cash-out carries tighter LTV caps, higher reserves, stricter seasoning, and often higher pricing. Staying within rate-and-term parameters preserves better terms.
What LTV is available on rate-and-term?
Generally higher than cash-out, often up to 75 or 80 percent depending on the lender and file strength.
Are seasoning requirements lighter?
Typically yes. Rate-and-term refinances often have shorter or no seasoning requirements compared to cash-out.
When does rate-and-term make sense?
When rates have improved, when exiting an adjustable structure into a fixed one, when exiting short-term financing, or when changing vesting into an entity.
Can I use it to exit a bridge loan?
Yes, and it is a common use. Refinancing a stabilized property out of short-term financing into long-term is typically a rate-and-term transaction.
How do I know if refinancing is worthwhile?
Compare the total cost — closing costs, points, any penalty on your existing loan — against the savings over your expected remaining hold.
What is the break-even calculation?
Divide total refinance costs by the monthly payment savings. That gives the months to recover the cost. Compare it to how long you will hold.
Does my existing prepayment penalty matter?
Considerably. If you are still within a penalty period, that cost may exceed the savings from refinancing. Check your current loan documents first.
Can I shorten my loan term?
Yes. Refinancing from a 30-year to a shorter term raises the payment but reduces total interest. Model the effect on your coverage ratio before doing so.
Can I move from ARM to fixed?
Yes, and it is a common motivation. Investors approaching an ARM reset frequently refinance into fixed-rate financing for payment certainty.
Can I change from interest-only to amortizing?
Yes, though the payment increases and your coverage ratio falls. Model it before proceeding.
Do I need a new appraisal?
Generally yes, to establish current value and market rent for the new loan.
What if my property has declined in value?
A lower value could push your LTV above the lender's maximum, which may prevent the refinance or require you to bring cash to reduce the balance.
Can I refinance into an entity?
Yes. This is a clean way to move a property from personal name into an LLC without the due-on-sale exposure of a title transfer.
How long does the process take?
Similar to a purchase, commonly a few weeks. Appraisal and title work drive most of the timeline.
What should I prepare?
Current loan payoff figures and penalty details, current leases and payment history, insurance documentation, and entity documents if applicable.
