A homeowner replaces an existing mortgage with a new loan, receives no cash beyond closing adjustments, and uses all proceeds to pay off the old lien and refinance costs. How is the transaction best classified?
Correct Answer
B) Rate-and-term refinance
Why this is correct: A rate-and-term refinance is defined as replacing an existing mortgage primarily to change the interest rate, loan term, or loan type, without taking cash out. The proceeds are used solely to pay off the old debt and closing costs. Why the other choices are wrong: 'Purchase-money mortgage' is wrong because this transaction is not financing the acquisition of a new property. 'Construction-only loan' is wrong because the loan is not for building a new structure. 'Reverse mortgage' is wrong because that is a specific product where the borrower receives payments and does not make monthly payments, which is not described here. Exam tip: Key indicator of a rate-and-term refi: No cash goes to the borrower beyond paying off the old loan and closing costs.
Why This Is the Correct Answer
Why this is correct: A rate-and-term refinance is defined as replacing an existing mortgage primarily to change the interest rate, loan term, or loan type, without taking cash out. The proceeds are used solely to pay off the old debt and closing costs. Why the other choices are wrong: 'Purchase-money mortgage' is wrong because this transaction is not financing the acquisition of a new property. 'Construction-only loan' is wrong because the loan is not for building a new structure. 'Reverse mortgage' is wrong because that is a specific product where the borrower receives payments and does not make monthly payments, which is not described here. Exam tip: Key indicator of a rate-and-term refi: No cash goes to the borrower beyond paying off the old loan and closing costs.
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