What Is a Rate-and-Term Refinance?
A rate-and-term refinance replaces your existing mortgage with a new one — typically at a lower interest rate, a different loan term, or both. Unlike a cash-out refinance, you're not borrowing additional funds beyond what's needed to pay off the existing loan and closing costs.
For investors, a rate-and-term refi is a strategic tool for reducing monthly payments, improving cash flow, and converting from a temporary loan to a permanent one.
When Rate-and-Term Makes Sense
1. You're on a High-Rate Bridge or Hard Money Loan
If you acquired a property using a bridge loan or hard money and have since stabilized it (completed rehab, placed a tenant), a rate-and-term refinance into a DSCR or conventional loan reduces your rate from the 10–13% range to the 6–8% range.
2. Market Rates Have Dropped
If rates have fallen since you originated your current loan, refinancing locks in the lower rate. Even a 0.5% reduction can save thousands over the life of the loan.
3. You Want to Change Your Loan Term
Switching from a 15-year to a 30-year term reduces monthly payments and improves cash flow (at the cost of more total interest). Conversely, moving to a shorter term accelerates equity buildup.
4. You're Removing a Prepayment Penalty
Some investors refinance once an existing prepayment penalty expires to access better terms that weren't available when the original loan was originated.
Rate-and-Term vs. Cash-Out
| Feature | Rate-and-Term | Cash-Out |
|---|---|---|
| Purpose | Improve terms | Access equity |
| LTV limits | Often higher (up to 80%) | Typically 70–75% |
| Rate | Usually lower | Slightly higher |
| Cash to borrower | None (or minimal) | Yes |
| Best use case | Lower payment, convert loan type | Fund new acquisitions |
The Break-Even Calculation
Before you refinance, calculate the break-even point:
Break-Even = Total Closing Costs ÷ Monthly Payment Savings
If your closing costs are $4,000 and you save $300/month, your break-even is about 13 months. If you plan to hold the property longer than that, the refinance makes sense.
Documentation Required
For a DSCR rate-and-term refinance:
- Current mortgage statement
- Property insurance
- Lease agreement or rent roll
- Appraisal (ordered by the lender)
- Entity documents (if LLC-owned)
No personal income documentation is required for DSCR-based programs.
Ready to Lower Your Rate?
Use our Rate & Term Refinance Calculator to model your savings, or schedule a call with a Prime Advisor.