Rate-and-Term Refinance: When a Lower Rate Beats Pulling Cash
Not every refinance needs to pull cash. Here's when lowering the rate or changing the terms is the better move, and how to know it pays.
Short answer
A rate-and-term refinance replaces your loan with a new one at a better rate or structure, without taking cash out. It pays off when the monthly savings recover the closing costs well before you'd sell or refinance again. Divide the costs by the monthly savings to find the break-even month.
Key points
- No cash out, and often better pricing than cash-out.
- Break-even = closing costs ÷ monthly savings.
- Check the prepayment penalty on the old loan first.
When rate-and-term makes sense
- Rates have dropped meaningfully since you borrowed
- You want to move from an adjustable or interest-only loan to a fixed payment; see fixed or adjustable for rentals
- You're replacing short-term debt with a long-term loan
- You're moving the property into an LLC as part of the refinance; see buying a rental in an LLC
Doing the math
Compare the new payment with the old one, then divide the closing costs by the monthly savings.
Deal sheet: $300,000 balance, 30-year terms, illustrative
| Amount | |
|---|---|
| Payment at 8.25% | $2,254 |
| Payment at 7.25% | $2,047 |
| Monthly savings | $207 |
| Closing costs | $6,000 |
| Break-even | 29 months |
If you'll keep the loan well past 29 months, this refinance pays. If you might sell within a year, it doesn't.
Thinking about tapping equity? Send the address and your loan balance, and we'll show you the options. Review my equity
Before you refinance
- Check the prepayment penalty on your current loan; see DSCR prepayment penalties.
- Compare against cash-out if you have a use for the equity; see cash-out refinancing on a rental.
- Make sure the new payment still leaves the cash flow you want.
Frequently asked questions
What is a rate-and-term refinance?
It's a refinance that changes your interest rate, loan term or structure without taking cash out beyond closing costs.
How do I know if refinancing my rental is worth it?
Divide the closing costs by the monthly savings to find the break-even month. If you'll hold the loan well beyond it, the refinance pays.
Is rate-and-term cheaper than cash-out?
Often, yes. Rate-and-term refinances usually price better than cash-out because the loan isn't growing.
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