Let’s dive into rate and term refinancing—what it means and why you might want to consider it. A rate and term refinance is your typical, air quotes, “normal” refinance. Now, compliance won’t let me say there’s such a thing as “normal,” but this is what most people are thinking of when they say they’re refinancing.

With a rate and term refinance, the goal is to:

  • Save money
  • Lower your monthly payment

Whether you’re creating some extra cash flow with a lower monthly payment or saving money on interest or mortgage insurance, these are usually the main reasons people go for this type of refinance.

What Is Rate and Term Refinancing?

A rate and term refinance is where you’re either changing your interest rate or your loan term, or both. You’re not taking cash out of the home’s equity—like you would with a cash-out refinance—and you’re not borrowing for home improvements or other purposes.

Here’s the breakdown:

  • Change your interest rate: Maybe the current rates are lower than what you originally locked in, and refinancing will help you get a better deal on your mortgage.
  • Change your loan term: You might want to shorten the term of your loan to pay it off faster and save on interest in the long run, or you could extend it to lower your monthly payment.

Saving Money vs. Lowering Your Monthly Payment

This is where things get interesting. Many people think that refinancing is all about lowering their monthly payment. That’s not always the case, and here’s why.

  • Saving Money: This means you’re reducing the total amount of interest or mortgage insurance you’ll pay over the life of the loan. This is real savings.
  • Lowering Your Payment: You might lower your monthly payment, but it doesn’t always mean you’re saving money. Sometimes, you’ll just extend the loan term, and while you’ll have a lower monthly payment, you could end up paying more in interest over time.

Let me give you an example:

Say you’re paying $3,000 a month on your current 30-year mortgage. You’ve been making payments for four years. Now, you refinance into a 20-year loan, and you keep your monthly payment at $3,000. Even though your monthly payment stays the same, you’re going to save a ton in interest because you’re paying off the loan faster. You just cut six years off your mortgage, and that’s a big deal.

You can even save money if you refinance into a higher rate but shorten the loan term. The math might surprise you, but it works because you’re reducing the total time you’re paying interest.

When Refinancing Creates Cash Flow

Now, sometimes the goal isn’t to save money on interest, but rather to free up some cash each month. Let’s say you’re not as worried about paying off the loan faster, but you could really use a lower monthly payment right now to help with your budget. That’s where refinancing for cash flow comes in.

Here’s how it works:

  • You refinance into a 30-year loan, which resets the clock on your mortgage.
  • This lowers your monthly payment, giving you an extra $300, $500, or even more to work with each month.

This extra cash flow can be a lifesaver if:

  • A spouse has stopped working to take care of the kids.
  • You’ve had a job change that affected your income.
  • The economy is tough, and commissions or bonuses aren’t rolling in like they used to.

Cash flow doesn’t equal savings, but it does help you manage your monthly budget. And in some cases, you might get both—cash flow and savings, which is the best-case scenario.

couple signing mortgage papers

How Rate and Term Refinances Work

Here’s what happens when you go through a rate and term refinance:

  • Change the interest rate: You lock in a new, lower rate, which can reduce your monthly payment or help you save on interest over time.
  • Adjust the loan term: You shorten the term to pay off the loan faster (and save on interest), or extend it to reduce your monthly payment.
  • Keep your payment the same, but save money: By refinancing into a shorter term, even if your monthly payment stays the same, you’re saving a significant amount in interest.

Should You Refinance for Savings or Cash Flow?

If you’re wondering whether a rate and term refinance is the right move, ask yourself these questions:

  • Are you looking to save money over the life of your loan by paying less in interest?
  • Do you need extra cash each month to help with your budget?
  • Are you aiming to do both—create cash flow and save money?

Whatever your goal, a rate and term refinance can help you meet it. Whether you’re looking to save on interest, reduce your mortgage insurance, or just lower your monthly payment, the key is understanding what’s best for your financial situation.

Other Types of Refinances to Consider

If you’re not sure whether a rate and term refinance is right for you, there are other options to consider:

  • Cash-Out Refinance: If you want to tap into your home’s equity, a cash-out refinance might be the way to go. It lets you take cash out of the home to pay off debt, fund home improvements, or cover other expenses.
  • Home Improvement Loans: These are specific refinances designed to help fund improvements to your home.
  • Reverse Mortgages: These are great for older homeowners who want to access the equity in their home without having to make monthly mortgage payments.

We’ve got more details on all these options, so check out the links below for cash-out refinances, home improvement loans, and reverse mortgages.

Talk to the Mortgage Mark Team

If you’ve got questions about whether a rate and term refinance makes sense for you, reach out to the Mortgage Mark team. We’re here to help walk you through the process and figure out what’s best for your financial goals.

As always, when you think mortgage, think Mark!

mark pfeiffer

Mark Pfeiffer

Branch Manager
Loan Officer, NMLS # 729612
(972) 829-8639
MortgageMark@MortgageMark.com

Translate »