Rate-and-Term Refinance vs. Cash-Out Refi: What’s the Difference?

Refinancing your mortgage can be a smart financial move—but before you get started, it’s important to know your options. Two of the most common types are the rate-and-term refinance and the cash-out refinance.

While both replace your existing mortgage with a new one, the goals and outcomes of each are very different. Let’s break down the key differences so you can decide which might be right for you.

What Is a Rate-and-Term Refinance?

A rate-and-term refinance allows you to change the interest rate, loan term, or both—without pulling any cash out from your home equity.

Common Reasons to Choose a Rate-and-Term Refi:

1. To lower your interest rate and monthly payment
2. To switch from an adjustable-rate to a fixed-rate mortgage
3. To shorten your loan term (e.g., from 30 years to 15 years) and pay off your home faster
4. To remove private mortgage insurance (PMI) if your home has gained enough equity

This type of refinance is ideal if your main goal is to save money or reduce your financial risk over time.

What Is a Cash-Out Refinance?

A cash-out refinance also replaces your current mortgage with a new one—but it allows you to borrow more than you owe on your home, and take the difference in cash.

You’re tapping into your home equity to access funds for big expenses like:

1. Paying off high-interest debt
2. Financing home improvements
3. Covering college tuition
4. Building an emergency fund or investing elsewhere

Key Considerations:

1. You’ll likely see a higher loan balance (and possibly a higher monthly payment)
2. Interest rates for cash-out refis are often slightly higher than standard refis
3. You must maintain at least 20% equity in your home after the refinance in most cases
4. Building an emergency fund or investing elsewhere

What Type of Loan Are You Looking For?

Which One Is Right for You?

Choose a rate-and-term refinance if you want to reduce your monthly payment, shorten your term, or lock in a better interest rate.

Choose a cash-out refinance if you want to access equity for big financial goals and can comfortably manage a larger loan.

Final Thought

No matter which path you take, refinancing can be a powerful financial tool when used strategically. The best choice depends on your current goals, your home’s equity, and your long-term plan.

Schedule a consultation to speak with a loan officer or start the process online today.