What Constitutes a Rate and Term Refinance?

What Constitutes a Rate and Term Refinance?

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November 17, 2022

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Are you unhappy with your current interest rate?

You’re not alone! According to Attom, a real estate and property data company, 1.45 million U.S. homeowners refinanced into a new loan during the first quarter of 2022.

Your existing mortgage may not serve the needs of your current financial state today. A rate and term refinance can be a great solution to benefit from affordable loan terms, especially during an economic downturn.

As a Sunshine State resident, you should consider a rate and term refinance. However, if you are not interested in taking out more debt on your existing mortgage or are not interested in a second mortgage, maybe this type of refinance is for you.

Mortgage refinancing can be a good choice. If a more favorable rate, or paying your mortgage off faster is a personal finance goal, a rate and term refinance may interest you.

What Is a Rate and Term Refinance?

A rate and term refinance is also called a no cash-out refinance. The loan balance remains the same. However, the monthly payment is lowered and this type of loan can change your payoff date.

This type of refinancing can be beneficial if you are looking to lower your monthly payments, or shorten or extend the length of your loan. Whatever your financial goals are, your refinance options can assist you in weathering a financial storm.

Who Qualifies for a Rate and Term Refinance?

The underwriter will consider your credit score, credit history, debt-to-income ratio (DTI), and other factors. Requirements may differ from lender to lender to qualify for your new mortgage.

In general, a credit score of 620 is required for a rate and term refinance. Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA) loans may have lower minimum credit score requirements.

Reasons to Do a Rate and Term Refinance

If you are anticipating a change in income from a salary increase or you’re planning retirement, refinancing your original mortgage may be a good idea. A mortgage refinance can be intimidating, but it’s worth it.

It is also worth considering a rate and term refinance for the following reasons:

Lower Your Rate

Low interest rates are a common reason for refinancing an adjustable-rate mortgage or lowering a high-interest rate on a fixed-rate mortgage. If you can benefit from a lower refinance rate, your loan amount will be more attractive to your bottom line.

The National Association of Realtors reports that homeowners can save hundreds to thousands of dollars annually by refinancing their home loans. Lower interest rates are the foundation of more affordable monthly payments.

Reduce Your Payment

Monthly mortgage payments can be reduced with a lower interest rate and extended mortgage loan terms. Floridian homeowners can benefit from reduced payments with the help of a rate and term refinance loan.

Eliminating private mortgage insurance (PMI) can also reduce your payment.  The interesting fact is that you must pay PMI if your down payment was less than 20%. For a refinance, you also need 20% equity in your home.

Change Your Term Length

If you have a desired mortgage payoff timeline, you have the option to shorten your loan term. A rate and term refinance – or what is also known as no-cash out refinance – provides the option of a 15-year mortgage.

Change Your Loan Type

Not only can you change your existing loan from an adjustable-rate mortgage to a fixed-rate mortgage, but you can also change your loan type.

The great news is you can switch from an FHA to a conventional mortgage loan. If this meets your personal finance goals, a  rate and term refinance may be a great choice.

When Should You Consider a Rate and Term Refinance?

Whether you’re in Tampa Bay or Sarasota, knowing when to refinance your current loan will help you implement the best financial plan. A rate and term refinance should be considered when you accomplish the following:

Your Credit Score Improves

Credit scores and debt-to-income ratios (DTI) are different from lender to lender. There are some general minimum requirements. As mentioned earlier, a credit score of 620 is usually a minimum requirement.

A low debt to Income ratio of less than 40% is always a good idea. But don’t let these numbers scare you – contact us at Associates Home Loan of Florida, Inc. with all your questions. We will be happy to help you on your refinance journey.

Your Salary Increases

A salary increase combined with a mortgage reduction is one of the best financial formulas. You can pocket the extra cash for a rainy day fund or save for home improvements to increase your home value.

You also have shorter loan term options with a new interest rate. This may require higher monthly payments. With this benefit, you may be able to establish and build home equity sooner.

You Have 20% Equity in Your Home

Since you are not increasing your debt, ideally the 20% equity needed in your home is for cash-out refinances. If you want to eliminate your PMI, you’ll need 20% equity in your home.

A rate and term refinance may allow you to save up to $2,000 in closing costs or you can receive this cash out at closing. An amount of $2,000 represents 1% to 2% of the loan’s value.

Your Break-Even Point Matches Your Plans

The break-even point is when you’ve achieved monthly savings from your refinance cost. How do you know when you’ve reached your break-even point?

First, determine the total amount of your closing costs. Then, divide this number by the amount that you are saving each month as a result of your new loan.

The resulting number is the number of months it will take to break even on your investment.

For example, if your closing costs totaled $2,000 and you are saving $100 each month as a result of your new loan, it will take 20 months to break even.

Apply for a Rate and Term Refinance Today

Is refinancing a good option for you? It’s a great way to lower your monthly payments, save money on interest, or shorten the length of your loan.

If you’re interested in refinancing your home loan, don’t hesitate to apply with Associates Home Loan of  Florida, Inc today! We offer competitive rates and terms and are committed to helping you find the right mortgage solution for your unique situation. 

Apply now to get started!

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