Rate-and-Term vs. Cash-Out Refinance: Which Is Right for You?

Refinancing replaces your current mortgage with a new one. The two most common types are a rate-and-term refinance and a cash-out refinance. They solve different problems, so it’s worth understanding the difference before you apply.

What is a rate-and-term refinance?

A rate-and-term refinance changes your interest rate, your loan term, or both, without taking extra cash out. Homeowners use it to lower their monthly payment, shorten their term (for example, from 30 years to 15), switch from an adjustable rate to a fixed rate, or move from an FHA loan to a conventional loan to remove mortgage insurance.

What is a cash-out refinance?

A cash-out refinance replaces your mortgage with a larger loan and gives you the difference in cash. Common uses include home renovations, consolidating higher-interest debt, or covering major expenses. Keep in mind that consolidated debt is rolled into your mortgage, not eliminated, and stretching it over a longer term can increase the total interest you pay.

How do the two compare?

• Goal: rate-and-term improves your loan; cash-out turns equity into cash.
• Loan amount: rate-and-term stays about the same; cash-out increases your balance.
• Pricing: cash-out loans often carry slightly higher rates or costs than rate-and-term loans.
• Equity required: cash-out programs limit how much of your home’s value you can borrow.

How do you know if refinancing is worth it?

Start with the break-even point: divide your total closing costs by your monthly savings. If it costs $4,000 to refinance and you save $200 a month, you break even in 20 months. If you plan to stay in the home longer than that, the refinance may make sense.

When a rate-and-term refinance makes sense

• Rates have dropped meaningfully since you got your loan
• You want to pay your home off faster
• You want to remove FHA mortgage insurance
• You want the stability of a fixed rate

When a cash-out refinance makes sense

• You have significant equity and a clear use for the funds
• You’re replacing much higher-interest debt and have a plan to avoid running it back up
• You’re funding improvements that add value to your home

Are there other options?

If you like your current rate, a home equity loan or home equity line of credit (HELOC) may let you access equity without replacing your first mortgage. Homeowners with FHA or VA loans may also qualify for streamline refinance programs with reduced documentation.

Ready to get started? Apply online, call me at 614-348-0916, or send me a message. I’m happy to answer questions, no obligation.

Jack Pardi is a mortgage loan officer with DNVR Lending in Denver, Colorado. NMLS #2408286. DNVR Lending, LLC NMLS #2403751. This article is for general information only and is not a commitment to lend. Not all borrowers will qualify; programs and guidelines are subject to change.