A rate and term refinance is when a borrower refinances to lower the interest rate and/or term of their current mortgage.
Generally speaking, a rate and term refinance poses less risk to the lender so may be easier to qualify for than a cash out refinance.
Lenders sometimes give borrowers lower rates when they only do rate and term refinance. Cash-out refinances are considered riskier loans so some lenders add onto the base rate to compensate for this risk.
Sometimes it is possible to do a rate and term refinance on your first mortgage and then a cash out loan on the second mortgage. These can be done at the same time. Doing a rate and term refinance on the first will get you a lower rate.
Rate and term refinances can also include paying property taxes that are due without being classified as a cash out transaction.
Usually people do a rate and term refinance because they want to lower their monthly mortgage payments. Having a lower interest rate, and spreading your payments out over a longer period of time, equates to paying less each month.
Most lenders will allow a maximum of $2,000 to the borrower when doing a rate and term refinance. Anything over that $2,000 number, and it is considered a cash-out refinance.
A rate and term refinance would not include a debt consolidation refinance or a cash out refinance.
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