Rate and Term Refinance: What It Can Pay For Under Fannie Mae Rules

A rate and term refinance replaces an existing mortgage with a new one to change the interest rate, the loan term or both, without taking meaningful cash out of the home. Fannie Mae calls it a limited cash-out refinance, and its Selling Guide spells out what the new loan can pay for and when a transaction has to be treated as a cash-out refinance instead.

What a rate and term refinance can pay for

Under Fannie Mae's rules, the new first mortgage on the same property can be used to:

• Pay off the existing first mortgage, including amounts such as prepayment penalties and late fees
• Pay off a second mortgage, but only if that loan was used to buy the property
• Finance closing costs, points and prepaid items
• Include current real estate taxes, as long as they are paid to the taxing authority at closing
• Buy out a co-owner under a written agreement

The borrower can also receive a small amount of cash back: no more than the greater of 1% of the new loan amount or $2,000.

At least one borrower on the new loan generally must already be on the title when the application is made. Fannie Mae allows exceptions, such as a property acquired through inheritance or awarded in a divorce.

How a rate and term refinance differs from cash-out

Fannie Mae says a refinance must be treated as cash-out, not limited cash-out, when:

• There is no existing first mortgage on the property
• The new loan pays off a second mortgage that was not used to buy the home
• Real estate taxes more than 60 days delinquent are rolled into the loan

The difference matters for how much can be borrowed. On Fannie Mae's eligibility matrix for a one-unit principal residence, the maximum loan-to-value ratio is 97% on a fixed-rate limited cash-out refinance, compared with 80% on a cash-out refinance. Fannie Mae adds conditions above 95%, including that the existing loan be owned or securitized by Fannie Mae and that the new loan be fixed-rate with a term of up to 30 years.

Fannie Mae also requires that a home previously listed for sale be taken off the market on or before the day the new loan funds.

Running the numbers before a rate and term refinance

Because a rate and term refinance is usually about the payment or the payoff timeline, the main question is whether the savings outlast the closing costs. The refinance break-even calculator compares the monthly payment change with the upfront costs. Borrowers who would rather not pay costs upfront can read how a no-closing-cost refinance shifts those costs into the rate or the loan, and the guide to how a mortgage rate lock works covers holding a quoted rate while the loan closes.

Frequently asked questions

Can I get any cash back from a rate and term refinance? Under Fannie Mae rules, a small amount, up to the greater of 1% of the new loan amount or $2,000. Refunds of overpaid fees required by law do not count toward that limit if they are documented.

Can a rate and term refinance pay off a second mortgage? Only if the second mortgage was used to buy the property and the lender documents that. Paying off a second lien that was not part of the purchase makes the loan a cash-out refinance under Fannie Mae's rules.

Does a rate and term refinance have to shorten my loan term? No. Fannie Mae lists modifying the interest rate, the term or both as acceptable uses, so a borrower can change one without the other.

Sources

• Fannie Mae Selling Guide, B2-1.3-02, "Limited Cash-Out Refinance Transactions" (10/08/2025; accessed Oct. 30, 2026): https://selling-guide.fanniemae.com/sel/b2-1.3-02/limited-cash-out-refinance-transactions
• Fannie Mae, Eligibility Matrix (Aug. 5, 2026; accessed Oct. 30, 2026): https://singlefamily.fanniemae.com/media/20786/display