A rate and term refinance is when a borrower refinances to lower the interest rate and/or term of their current mortgage.
A rate and term refinance would not include a debt consolidation refinance or a cash out refinance. A rate and term refinance is where a new loan is taken out that has a different interest rate or is for a different length of time. This is very common when there is an adjustable rate mortgage (ARM) that is going to reset to a higher interest rate. Rate and Term Refinance loans on Primary Residences in Texas do not allow you to "roll in" your closing costs by including them in the loan amount, however alternatives do exist to allow rate and term refinance loans in Texas without out of pocket fees. Rate and term refinances can also include paying property taxes that are due without being classified as a cash out transaction. Usually people do a rate and term refinance because they want to lower their monthly mortgage payments. Having a lower interest rate, and spreading your payments out over a longer period of time, equates to paying less each month. Most lenders will allow a maximum of $2,000 to the borrower when doing a rate and term refinance. Anything over that $2,000 number, and it is considered a cash-out refinance. Generally speaking, a rate and term refinance poses less risk to the lender so may be easier to qualify for than a cash out refinance. Lenders sometimes give borrowers lower rates when they only do rate and term refinance. Cash-out refinances are considered riskier loans so some lenders add onto the base rate to compensate for this risk. Sometimes it is possible to do a rate and term refinance on your first mortgage and then a cash out loan on the second mortgage. These can be done at the same time. Doing a rate and term refinance on the first will get you a lower rate.
If you have an ARM that is about to adjust, you should be looking to do a rate and term refinance. There are great programs for rate and term refinances for those with little to no equity in their home. Term selection on a Rate and Term Refinance is an issue primarily on which are available ranging from 10 years to 40 years. Many times when you here low rates advertised on the radio they are for rate term refinancing and not cash out. A cash out refinance will generally have a rate that is higher then a rate term refinance.
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