Homeowners refinance their mortgages for a variety of reasons, and this is why loans have a variety of names. When your lender calls a loan a “rate/term refinance” it means two things. First, a new mortgage will replace an existing one. Second, the interest rate (rate) and the length of the loan (term) are subject to change. The rate alone could change, the term alone could change, or they both could change as a result of the new mortgage.
Terminology: The counterpart to a rate/term refinance is a cash-out refinance. With a cash-out refinance, the purpose is not changing the loan itself, per se, but obtaining a lump sum of money from the equity in one’s home. This is why a rate/term refinance is sometimes called a “no-cash-out refinance” or NCO.
Now for the big question: When is the best time to apply for a rate/term refinance? The short answer: when it improves a borrower’s finances. Several factors come into play here, the most obvious one being a lower interest rate.
People often consider refinancing when the popular media reports that interest rates are down. This can be a solid financial choice but depends on a number of factors. The change in payment and the length of time the borrower plans to own the home are two of the biggest. Rates fluctuate daily, so if you’re considering refinancing to obtain a better rate, don’t wait until the news reports on it. Call your loan officer or find one via www.ruoff.com to discuss your options based on today’s market.
Also, if your credit has improved since you qualified for your existing mortgage, you might qualify for a better rate regardless of market forces. A loan officer can run a credit check for you and work with their underwriting department to determine whether you pre-qualify into a better credit tier.
A third point to consider regarding a rate-driven refinance is the multitude of loan products available. There may simply be different loan options available to you this year that were not available in years past. Homeowners are wise to periodically check in with their loan officers regarding the latest options. For example, if you currently have an adjustable-rate loan and are uncomfortable with an upcoming rate adjustment, inquire with your lender regarding a fixed-rate loan or a longer-term adjustable loan.
The majority of home buyers opt for a 30-year mortgage, with the second most common term being 15 years. These are not the only terms available. Sometimes borrowers refinance from a shorter-term loan into something longer (30 years or more) to lower their monthly payment. Other borrowers choose to replace 30-year loans with 10- or 15-year loans because shorter terms typically offer lower rates. Plus, shorter terms mean that you’ll pay less interest over the life of the loan because the principal decreases more rapidly.
This question is more complicated than it seems. Benchmark interest rates are what the media talks about, but they’re only one piece of the puzzle. If your credit has improved or your home’s value has appreciated, you could qualify for a better interest rate regardless of national rate trends. Talk to an experienced Loan Officer to learn your options and what your new payment might look like. Also, consider how your new loan could benefit your financial plan if you change the term. A trusted mortgage lender can dive deeper into your financial plan and help you to choose the right refinance product at the right time.
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