What is a rate-and-term refinance?

A rate-and-term refinance replaces your existing mortgage with a new loan at a different interest rate, different term, or both. Unlike a cash-out refinance, no additional money is borrowed against your home equity. The only change is the cost structure of your loan: lower rate, shorter term, or both. Rate-and-term refis typically have lower closing costs and better rates than cash-out refis.

When does a rate-and-term refinance make sense?

A rate-and-term refinance makes sense when current rates are at least 0.5-1.0% lower than your existing rate and you plan to stay in the home long enough to recoup closing costs (typically 2-4 years). It also makes sense to shorten your term — refinancing from 30 years to 15 or 20 years at a lower rate can save hundreds of thousands in interest, even if the monthly payment is similar.

How long does it take to break even on a refinance?

Break-even = closing costs divided by monthly savings. On a $285,000 loan refinancing from 7.25% to 6.25% with $6,500 in closing costs and a savings of $180/month, break-even is about 36 months (3 years). If you plan to stay in the home for 5+ years, the refinance is strongly beneficial. If you might sell in 2 years, the savings may not exceed the closing costs.

Should I refi to a 30-year or shorter term?

If you can afford the higher payment, a shorter term almost always saves more total money. Refinancing a $285,000 balance from 7.25% to 6.25% on a 30-year term saves significant interest, but the same rate on a 20-year term saves dramatically more total interest and builds equity faster. The optimal strategy is the shortest term where the new monthly payment is affordable within your budget.

What is the difference between rate-and-term and cash-out refinance rates?

Cash-out refinances typically carry a rate premium of 0.25-0.625% above rate-and-term refinance rates because they represent higher lender risk — more money is being borrowed. If you do not need cash, a rate-and-term refi gives you the best rate. If you need cash, compare the all-in cost: the higher rate on cash-out plus the interest on the additional borrowed amount, versus the cost of a separate HELOC or home equity loan.

Rate-and-Term Refinance Calculator

Calculate exactly what you save by refinancing to a lower rate or shorter term — new payment, break-even months, total interest savings, and whether it is worth the closing costs.

Current Loan Balance

Current Interest Rate

Remaining Term

years

New Interest Rate

New Loan Term

years

Closing Costs

Monthly Savings

+$252/mo

Break-even in 26 months (2.2 yrs). Lifetime savings: $12,027.

Current Payment

$2,007

New Payment

$1,755

Break-Even

26 months

Closing Costs

$6,500

Lifetime Interest (Current)

$365,253

Lifetime Savings (Net)

$12,027

Advanced

Term Options, Rate Scenarios & vs Cash-Out Comparison

Same-term vs shorter-term refi, rate sensitivity, rate-and-term vs cash-out trade-off

Rate-and-term refi at 6.250%. Compare different term options — shorter terms save more interest but require higher payments.

Term	New Payment	vs Current	Total Interest	Net Savings	Break-Even
Keep remaining 27 yrs	$1,823	-$184	$305,682	$53,070	36 mo
25-year refi	$1,880	-$127	$279,017	$79,735	52 mo
20-year refi	$2,083	+$76	$214,955	$143,798	N/A
15-year refi	$2,444	+$437	$154,858	$203,895	N/A
10-year refi	$3,200	+$1,193	$98,998	$259,755	N/A

Key insight: Refinancing to a shorter term at a lower rate often saves dramatically more interest even if the monthly payment is similar or slightly higher. A 20-year refi at 6.250% typically saves more total interest than a 30-year refi at the same rate.

Pro

Optimal Term Selection, Recoupment & NPV Analysis

Find the shortest affordable term, true recoupment timeline, net present value of refinancing

The optimal refi term is the shortest term where the new payment does not exceed your current payment by more than 10%. Shorter = more interest saved. The table highlights which terms you can afford based on your current payment.

Term	New Payment	Affordable?	Total Interest	Net Savings	Verdict
10-year	$3,200	Too High	$98,998	$259,755	Skip
15-year	$2,444	Too High	$154,858	$203,895	Skip
20-year	$2,083	Yes	$214,955	$143,798	Recommended
25-year	$1,880	Yes	$279,017	$79,735	Recommended
30-year	$1,755	Yes	$346,726	$12,027	Recommended

Pro strategy: Pick the shortest term where the new payment is affordable. If you can handle a 20-year payment, do not take a 30-year — the additional interest cost over 10 extra years often exceeds $42,750 depending on your rate.

How to Use This Rate-and-Term Refinance Calculator

This calculator is built specifically for rate-and-term refinances — no cash out, just changing your interest rate or loan term or both. Enter these six values:

Current Loan Balance: Your outstanding balance today, not the original loan amount. Find this on your mortgage statement.
Current Interest Rate: Your existing rate. Check your monthly statement or original loan documents.
Remaining Term: Years left on your loan. A 30-year loan started 3 years ago has 27 years remaining.
New Interest Rate: The rate you have been quoted for the refinance. Get at least 3 quotes from different lenders.
New Loan Term: The length of the new loan. This does not have to be 30 years — you can choose 20, 15, or even 10.
Closing Costs: Total fees to close the new loan. Rate-and-term refinances typically cost $3,000-$8,000. Do not roll closing costs into the new loan unless necessary — it reduces savings.

Use Advanced to compare multiple term options side by side and evaluate rate sensitivity. Use Pro to find the optimal term and run a net present value analysis.

Rate-and-Term Refinance Formulas

New Monthly Payment = P × [r(1+r)^n] ÷ [(1+r)^n − 1]
Monthly Savings = Current Payment − New Payment
Break-Even = Closing Costs ÷ Monthly Savings
Net Lifetime Savings = Current Total Interest − New Total Interest − Closing Costs

Where P = loan balance, r = monthly rate (annual rate / 12), n = term in months. The break-even calculation is simple but the more sophisticated measure is net present value (NPV), which accounts for the time value of money — a dollar saved today is worth more than a dollar saved in year 10.

Rate-and-Term vs Cash-Out: Key Differences

A rate-and-term refi changes your interest rate and/or term with no additional cash borrowed. A cash-out refi lets you borrow against your equity, typically at a higher rate (0.25-0.625% premium) on a larger balance. For homeowners who do not need cash, rate-and-term always wins on cost. Cash-out makes sense only when the use of funds (high-rate debt consolidation, significant home improvements, investments) exceeds the higher borrowing cost.

The Term Length Trade-Off

Refinancing back to a full 30 years when you are 5 years into your existing mortgage means you will be paying for 35 total years instead of 30. Your payment drops, but you pay interest for 5 additional years. Choosing a 25-year term maintains your original payoff date. A 20-year term accelerates it. Always compare total cost of ownership, not just monthly payment.

Example: $285,000 Balance, 7.25% to 6.25%

David and Maria, refinancing their primary home in Austin, TX

Current Balance	$285,000
Current Rate / Term	7.25% / 27 years remaining
Current Monthly Payment	$1,971
New Rate	6.25%
New Term Option A	30 years — Payment: $1,756 (saves $215/mo)
New Term Option B	25 years — Payment: $1,870 (saves $101/mo)
New Term Option C	20 years — Payment: $2,086 (costs $115/mo more)
Closing Costs	$6,200
Break-Even (30-year)	29 months (2.4 years)
Net Savings at 5 years (30-yr)	$6,700
Net Savings at 10 years (30-yr)	$19,600
Net Savings (20-yr, total interest)	$87,400 despite higher payment

David and Maria chose the 20-year term even though the payment is $115/month higher. Their reasoning: they planned to stay in the house for 15+ years, and the $87,400 in lifetime interest savings vastly outweighed the higher payment. At 6.25% for 20 years, they also build equity much faster, which improves their financial position when they eventually downsize.

Frequently Asked Questions

Often yes, depending on your balance and holding period. On a $300,000 balance, 0.5% saves roughly $100-$125/month. With $5,000 in closing costs, break-even is 40-50 months. If you stay in the home for 5+ years, the total savings comfortably exceed closing costs. On a $500,000 balance, 0.5% saves $160-$200/month and break-even comes sooner. The traditional "1% rule" is outdated — use this calculator to run your specific numbers.

Rate-and-term refinance closing costs typically run $3,000-$8,000 and include: origination fee (0-1% of loan), appraisal ($400-$700), title insurance ($800-$2,000), recording fees ($50-$500), and escrow/prepaid items (insurance, property tax). No-closing-cost refinances exist but charge a higher rate — use our No-Closing-Cost Refi Calculator to compare. Always get a Loan Estimate from three lenders and compare APR, not just rate.

Yes, with some limitations. Conventional loans require at least 3-5% equity (95-97% LTV) but the best rates require 20%+ (80% LTV). FHA Streamline refinances allow refinancing with minimal equity verification. VA IRRRL (Interest Rate Reduction Refinance Loan) requires no appraisal for qualified veterans. USDA Streamline refinances are similar. If your home value has declined since purchase, a standard refinance may not be possible without PMI — compare FHA and conventional PMI costs in our PMI Calculator.

Paying points (1 point = 1% of loan, typically buys 0.25% rate reduction) only makes sense if you hold the loan long enough to recoup the point cost through lower payments. On a $300,000 loan, 1 point = $3,000 and saves roughly $50/month. Break-even = 60 months. If you might refinance again in 3 years, paying points is wasted money. Points are most valuable when rates are high (large dollar savings per 0.25% reduction) and you plan to keep the loan for 7+ years.

A refinance causes a temporary credit score dip of 5-15 points from the hard inquiry and new account opened. The old mortgage closes, which may reduce your average account age (a negative factor). However, within 6-12 months, the lower payment reduces credit utilization stress and the new account ages positively. Most borrowers see their credit score fully recover within one year. Multiple mortgage inquiries within a 14-45 day window are typically treated as a single inquiry for rate-shopping purposes.