Cash-Out Refinance vs. Rate/Term Refinance
A cash-out refinance replaces your mortgage with a larger loan and pays you the difference in cash. A rate/term refinance replaces your mortgage with a new loan to get a better rate or different term — without pulling cash out.
With a rate/term refinance, the goal is to lower your monthly payment, shorten your loan term, or switch from an adjustable rate to a fixed rate. With a cash-out refinance, the goal is to access your home equity for purposes like home improvements, debt consolidation, or major expenses. Each type has different LTV limits and qualification standards.
Cash-out refinances typically come with slightly higher interest rates and stricter guidelines because of the increased loan amount and risk. Rate/term refinances often have more favorable pricing because the loan balance stays the same or decreases. Both involve closing costs, so the savings or benefit must justify the expense.
Why This Matters: Choosing the wrong refinance type can cost you thousands. If you just need a better rate, a rate/term refi keeps your balance low. If you need cash, a cash-out refi provides it — but at a higher cost. Understanding the tradeoff helps you pick the right tool for the job.
Common question
What is the difference between cash-out and rate/term refinance?
A cash-out refinance increases your loan balance and gives you cash. A rate/term refinance changes your rate or term without adding to your balance. Each has different costs and qualification requirements.
Which refinance type has a lower interest rate?
Rate/term refinances generally have lower rates because the lender is not increasing the loan amount. Cash-out refinances carry slightly higher rates to account for the additional risk.
Related Topics
Related Mortgage Terms
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