Rate-and-Term Refinance: How It Works in Texas

What is a rate-and-term refinance?

In a rate-and-term refinance, the new loan pays off your existing first mortgage and covers the costs of the transaction. Under Fannie Mae Selling Guide B2-1.3-02, a limited cash-out refinance can be used to:

• Change the interest rate and/or term of the existing mortgage
• Pay off the existing first mortgage, including a HELOC in first-lien position
• Pay off a second mortgage, but only if it was used to buy the home
• Finance closing costs, points and prepaid items
• Buy out a co-owner under a written agreement, as long as the property was jointly owned for at least 12 months
• Provide cash back of no more than the greater of 1% of the new loan or $2,000

Paying off a second mortgage or HELOC that wasn’t used to buy the home turns the transaction into a cash-out refinance. The home must also be off the market by the time the new loan funds. Freddie Mac calls the same transaction a “no cash-out refinance” (Guide Section 4301.4). FHA calls it a “rate and term” or “simple” refinance.

Rate-and-term vs. cash-out refinance

If you need cash, compare a cash-out refinance with keeping your current loan and adding a line of credit. See HELOC vs. cash-out refinance in Texas. If you just want a better loan, rate-and-term is usually cheaper. Herring’s mortgage refinance page notes that cash-out rates are often higher than rate-and-term rates because of the added lender risk.

How much cash back is allowed

Small overages often happen when an escrow refund or a payoff figure changes. Fannie Mae lets lenders apply them as a principal curtailment rather than paying them out. In a Texas 50(f)(2) refinance, any extra has to stay within the “actual costs and reserves” limit, so your lender will be careful about it.

Texas 50(f)(2): converting a cash-out loan to rate-and-term

When you took cash out against your Texas homestead, your loan became a Section 50(a)(6) home equity loan. That status follows the loan, and it limits what you can do next. You can’t add a HELOC, because Texas allows only one 50(a)(6) loan at a time, and any refinance of the home equity loan has to follow special rules. Section 50(f)(2) lets you refinance it into a regular mortgage if all four conditions are met:

1. One-year wait. The refinance can’t close before the first anniversary of the home equity loan’s closing.
2. No new money. The new loan can include only funds to pay off debts the Constitution allows (such as the existing home equity loan and purchase-money liens), plus the actual costs and reserves the lender requires.
3. 80% cap. The new loan plus all other liens can’t exceed 80% of the home’s fair market value on the date of the refinance.
4. Written notice. The lender must give you a separate written notice no later than the third business day after you apply, and at least 12 days before closing. The notice explains that you’ll lose certain home equity protections.

What you give up, and what you gain

The required notice spells out the trade-off. A non-home-equity loan lets the lender foreclose without a court order and makes you and your spouse personally liable for the debt. In return you get:

• A regular first lien, which leaves room to add a HELOC or home equity loan later (still within the 80% cap)
• Access to the full range of rate-and-term programs, without the 2% fee cap and the 12-day closing structure
• Options like FHA and VA streamline programs later on, where you qualify

Under Section 50(f-1), a lien that meets the (f)(2) conditions is treated as an ordinary refinance lien. The Texas Finance Commission and Credit Union Commission publish their interpretations of these rules in 7 TAC Chapter 153. If your loan-to-value is above 80%, you can’t use 50(f)(2). Your only refinance path is another 50(a)(6) loan.

Worked example: Round Rock homeowner

Dana took a Texas cash-out refinance in 2024. Her home is now worth $400,000, and she owes $290,000 on an FHA cash-out loan at 7.00%. It carries 0.50% annual MIP, FHA’s rate for loans at 90% LTV or less, which lasts 11 years.

• LTV: $290,000 ÷ $400,000 = 72.5%. That’s under 80%, and more than a year has passed, so 50(f)(2) is available.
• Current payment: $1,929 principal and interest + $121 MIP = $2,050
• New conventional rate-and-term loan at an illustrative 7.25%, with no PMI because LTV is under 80%: $1,978
• Taxes at an assumed 2.0% of value ($667 a month) and insurance ($250 a month) are the same in both cases. Total PITI goes from about $2,967 to about $2,895.

Dana saves about $72 a month even though her new rate is higher. Dropping the MIP more than offsets the 0.25% rate increase. She also frees up room under the 80% cap to add a HELOC later. Run your own numbers with the Herring refinance calculator.

When a rate-and-term refinance makes sense

• Your rate is meaningfully above market. Herring’s Texas refinance page suggests looking for a new fixed rate at least 1 percentage point lower. Freddie Mac’s survey averaged 7.40% for the 30-year fixed on October 15, 2026, so borrowers who locked at 8% or more in 2023 and 2024 are the most likely to benefit.
• Your ARM is about to reset. A $320,000 balance that resets to 8.5% with 28 years left costs about $2,500 a month in principal and interest. A new 30-year fixed at 7.25% costs about $2,183.
• You want to drop mortgage insurance. FHA MIP lasts for the life of the loan if you put down less than 10%. A conventional refinance at 80% LTV or below removes it, as in Dana’s example. On conventional loans, PMI can often be cancelled without refinancing. Ask your servicer.
• You want to shorten your term. On $250,000, a 30-year loan at 7.40% costs $1,731 a month and about $373,000 in total interest. A 15-year at 6.71% costs $2,207 a month and about $147,000 in interest.
• You need to remove a co-borrower. After a divorce, a refinance in one spouse’s name removes the other from the loan. A buyout of the other owner’s equity can qualify as a limited cash-out refinance under Fannie Mae rules.

To figure out whether savings cover costs, read how much it costs to refinance in Texas. It includes the Texas title insurance refinance credit and a break-even formula.

How soon can you refinance? Seasoning by loan type

VA borrowers can find more on the VA’s IRRRL page. For a conventional loan, Herring’s conventional home loans page lists a typical 620 minimum credit score.

Steps and documents

1. Set your goal. Decide whether you want a lower payment, a shorter term, a fixed rate or no mortgage insurance. Your goal determines which loan and term make sense.
2. Check your equity. Estimate your home’s value and your payoff balance. In Texas, if you’re converting a home equity loan, total liens must be at or below 80%.
3. Apply and get a Loan Estimate. The lender must send it within three business days of your application. In a 50(f)(2) refinance, the lender must also give you the Texas notice by the third business day.
4. Gather documents. You’ll typically need 30 days of pay stubs, two years of W-2s (or tax returns if you’re self-employed), two months of bank statements, your current mortgage statement, your homeowners insurance declarations page, and any divorce decree or co-owner agreement.
5. Appraisal and title. Expect an appraisal (some programs waive it) and title work. Ask for the Texas R-8 title credit.
6. Lock your rate. Pick a lock period that covers your closing date. A 50(f)(2) refinance can’t close sooner than 12 days after the notice.
7. Close. Review your Closing Disclosure at least three business days before closing. For a primary residence, a 3-day right of rescission applies before funds are released.

For the full Texas process, see how to refinance a mortgage in Texas. If you’re still deciding whether to take cash out, cash-out refinance credit score requirements in Texas explains how the qualifying bar changes. For how Texas law treats home equity in general, see what home equity is in Texas.

Herring Bank NMLS #415783 | Member FDIC | Equal Housing Lender. This article is for educational purposes only and does not constitute financial, legal or tax advice. It is not a commitment to lend. Rates and payments shown are examples, not offers. Loan programs, rates and eligibility requirements are subject to change without notice and subject to credit approval. Texas Constitution provisions are summarized as general information. Consult an attorney about your specific situation.