Refinancing a mortgage can help homeowners reduce their interest rates adjust loan terms or achieve financial stability. One of the most common refinancing options is rate and term refinance which allows borrowers to change their loan structure without taking out additional cash.
For homeowners with Fannie Mae-backed loans understanding the rate and term refinance guidelines is essential for making informed financial decisions. This guide will explain what rate and term refinance is how it works under Fannie Mae eligibility criteria benefits and the step-by-step process to apply.
What Is Rate and Term Refinance?
A rate and term refinance is a type of mortgage refinancing where a borrower replaces an existing loan with a new one that has:
- A lower interest rate (to reduce monthly payments)
- A different loan term (e.g. switching from a 30-year to a 15-year mortgage)
This refinance option does not allow cash-out except for covering closing costs and prepaid items.
Fannie Mae Rate and Term Refinance Guidelines
Fannie Mae offers rate and term refinance through its standard refinancing programs. Here are the key guidelines:
1. Purpose of the Refinance
The refinance must be used to:
- Lower the interest rate
- Change the loan term
- Switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage
- Remove a co-borrower from the loan
2. Eligible Loan Types
Fannie Mae allows refinancing for:
- Primary residences
- Second homes
- Investment properties
The existing mortgage must be a conventional loan to qualify under Fannie Mae.
3. Loan-to-Value (LTV) Ratios
The LTV ratio determines the maximum loan amount allowed. Here are Fannie Mae’s LTV limits:
| Property Type | Max LTV (Fixed-Rate) | Max LTV (ARM) |
|---|---|---|
| Primary Residence | 97% | 95% |
| Second Home | 90% | 90% |
| Investment Property | 75% | 75% |
If the LTV exceeds 80% borrowers must pay private mortgage insurance (PMI).
4. Credit Score Requirements
- The minimum credit score for fixed-rate loans is 620.
- The minimum credit score for adjustable-rate loans (ARM) is 640.
- A higher credit score may qualify for better interest rates.
5. Debt-to-Income (DTI) Ratio
- Borrowers should maintain a DTI ratio of 45% or lower.
- In some cases borrowers with higher credit scores may qualify with a 50% DTI.
6. Employment and Income Verification
- Borrowers must provide income documentation such as W-2s pay stubs or tax returns.
- Self-employed borrowers may need to submit two years of tax returns.
7. Appraisal Requirements
- A new home appraisal is usually required.
- In some cases Fannie Mae may allow an appraisal waiver if automated valuation models (AVM) confirm property value.
Benefits of Rate and Term Refinance
Choosing a rate and term refinance through Fannie Mae offers several benefits:
1. Lower Monthly Payments
Refinancing to a lower interest rate can reduce monthly mortgage payments saving money over time.
2. Shorten the Loan Term
Borrowers can refinance a 30-year loan into a 15-year loan to build equity faster and pay less interest over the life of the loan.
3. Remove PMI
If a homeowner has at least 20% equity refinancing can help remove private mortgage insurance (PMI) reducing monthly costs.
4. Convert to a Fixed-Rate Loan
Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage provides stability and predictable payments.
5. Remove a Co-Borrower from the Loan
If a borrower wants to remove a co-signer or ex-spouse from the mortgage a rate and term refinance can help.
How to Apply for a Fannie Mae Rate and Term Refinance
Step 1: Check Eligibility
- Review Fannie Mae’s LTV credit score and DTI requirements.
- Ensure your loan type qualifies for refinancing.
Step 2: Gather Required Documents
Prepare financial documents such as:
- Recent pay stubs
- Last two years of W-2s or tax returns
- Bank statements
- Current mortgage statement
Step 3: Shop for Lenders
- Compare lenders that offer Fannie Mae-backed refinance loans.
- Request loan estimates to compare interest rates fees and closing costs.
Step 4: Submit Loan Application
- Complete the refinance application with your chosen lender.
- Pay any application fees if required.
Step 5: Home Appraisal (If Needed)
- A lender may order an appraisal to determine home value.
- If you qualify for an appraisal waiver this step may be skipped.
Step 6: Loan Underwriting
- The lender will verify income assets and creditworthiness.
- If additional documents are needed submit them promptly.
Step 7: Loan Approval & Closing
- Once approved review and sign the final loan documents.
- Pay closing costs (or roll them into the loan if permitted).
- The new loan replaces the old mortgage.
Common Questions About Rate and Term Refinance
1. Can I Get Cash from a Rate and Term Refinance?
No this refinance only allows funds for closing costs prepaid taxes and insurance. For extra cash a cash-out refinance is required.
2. Does Fannie Mae Allow Rate and Term Refinancing for Investment Properties?
Yes but the maximum LTV for investment properties is 75%.
3. How Long Does the Refinancing Process Take?
Typically it takes 30 to 45 days to complete a rate and term refinance.
4. Can I Refinance if My Home Value Dropped?
If the LTV is too high refinancing may require PMI or a special loan program like Fannie Mae’s High LTV Refinance.
5. Are There Closing Costs for Rate and Term Refinancing?
Yes closing costs typically range from 2% to 5% of the loan amount. Some lenders offer “no closing cost” refinance options where costs are rolled into the new loan.
A Fannie Mae rate and term refinance is a great option for homeowners looking to reduce interest rates change loan terms or remove PMI without taking cash out.
By understanding eligibility criteria benefits and the refinance process borrowers can make informed financial decisions and maximize their mortgage savings.
Before refinancing compare lenders check qualification requirements and ensure that refinancing aligns with your long-term financial goals.
