What is a Rate-and-Term Refinance?
A rate-and-term refinance replaces your existing mortgage with a new one that has a different interest rate, loan term, or both, without extracting equity as cash. The new loan amount is essentially the same as the remaining balance on the old loan (plus closing costs if rolled in). The goal is to reduce the interest rate, shorten the term, or switch from an adjustable to fixed rate.
Rate-and-term refinances are simpler and cheaper than cash-out refinances. Lenders offer better rates and higher LTV limits (up to 80% for investment properties vs. 75% for cash-out) because no additional cash is being extracted, keeping the lender's risk lower.
When rate-and-term refinancing makes sense
The classic rule of thumb is to refinance when you can reduce your rate by at least 0.5-1% and plan to keep the property long enough to recoup closing costs. Calculate the break-even: Closing Costs / Monthly Savings = Months to Break Even. If your break-even is 24 months and you plan to hold for 10 years, the refinance saves significant money over time.
Shortening the term is another common reason. Switching from a 30-year to a 15-year mortgage significantly reduces total interest paid over the loan's life, though monthly payments increase. For rental property investors, a shorter term means faster equity buildup and full ownership sooner.
Rate-and-term refinance for investors
Investors with portfolios of multiple rental properties should regularly evaluate refinancing opportunities. When market rates drop, refinancing even a few properties can add hundreds of dollars per month to portfolio cash flow. This increased cash flow improves DSCR ratios and may qualify you for additional investment loans.