Rate and Term Refinance
What it is:
A rate and term refinance occurs when a borrower replaces one mortgage that has a different and interest rate.with another
How it works (Example):
For example, let's say John Doe bought a house 10 years ago for $250,000. He mortgage is for 30 years at 5%, making the payment about $1,199 a month.$50,000 down and borrowed $200,000. His
At the end of the tenth, John notices that interest rates have gotten a lower and that he can get a mortgage for just 3%. However, he's been making ten years of payments and now only owes about $167,000 on the .
Typically, the bank loan at 3% for another 30 years, making the monthly payments just $705. But John wants to retire soon and doesn't want to "start all over" with another 30 years of making house payments. So, he does a rate and term refinance by borrowing $167,000 at 3% for just 20 years (the amount of time originally left on his mortgage). This makes the payments $928 a month—still lower than his original payment, thanks to the break in the interest rate—but he'll have the house paid off sooner.let John refinance the
Why it Matters:
Rate andrefinancings usually happen when interest rates drop. Their interest rates can be variable or fixed.
Sometimes when borrowers refinance, they borrow additional term refinancings usually do not involve that.