Which of the following best describes a 'rate and term refinance'?

A 'rate and term refinance' primarily focuses on changing the interest rate and the repayment terms of an existing mortgage without altering the loan amount itself. This type of refinance is commonly pursued to achieve better loan conditions, such as obtaining a lower interest rate or extending the loan term to reduce monthly payments. By doing so, borrowers can potentially save significantly on interest payments over the life of the loan.

This definition aligns well with why the choice refers to a refinance transaction with new loan terms. It emphasizes the essential shift in conditions while keeping the principal balance unchanged, which is a distinguishing feature of this refinance type.

In contrast, a transaction designed to lower monthly payments could involve various factors, including the loan amount or the interest rate but does not explicitly define the terms, leaving it more open to interpretation. A refinance that includes cash disbursement typically pertains to a cash-out refinance, which is not the same as a rate and term refinance. Meanwhile, a refinance that increases the principal amount also describes a cash-out refinance scenario rather than merely adjusting rates and terms.