Rate-and-Term Refinance vs. Cash-Out Refinance

When homeowners consider refinancing their mortgage, they’ll typically choose one of two basic types: a rate-and-term refinance (sometimes called a “no cash-out” refinance) or a cash-out refinance. Knowing the difference is critical for deciding which option aligns with your goals, equity position, and timeline.

Short answer:

A rate-and-term refinance replaces your existing mortgage with a new one that changes the interest rate, term, or loan type — but you don’t take cash out. A cash-out refinance, in contrast, allows you to borrow more than you owe, receive the difference in cash, and increase your loan balance.

This guide explains both options side by side: how they work, when each makes sense, how to qualify, the cost trade-offs, and how to benchmark your offer so you know you’re getting the right solution.

Key Takeaways

• With a rate-and-term refinance, you keep your loan balance roughly the same (or slightly changed) and focus on improving the payment or term.

• With a cash-out refinance, you increase your loan balance to tap into your home equity and receive cash at closing.

• Cash-out refinances may carry higher interest rates, higher LTVs, and pose greater risk from the lender’s perspective.

• Rate-and-term refinances are often the preferred option when your main goal is lowering your payment, shifting to a fixed rate, or removing mortgage insurance.

• Choosing between them depends on your equity, financial goals, how long you plan to stay in the home, and your refinance break-even point.

💡 Pro Tip: No matter the type of refinance you choose, always compare your options. Even a 1/8th difference in pricing can mean thousands of dollars over the life of the loan. Don’t be like thousands of homeowners and leave money on the table; compare your options to ensure you have a competitive deal.

What Is a Rate-and-Term Refinance?

Definition

A rate-and-term refinance replaces your current mortgage with a new one that changes your interest rate and/or loan term (for example, 30→15 years or ARM→fixed) without taking additional cash from your equity.

Primary Goals

• Lower your monthly payment

• Reduce total interest over the life of the loan

• Shorten your loan term

• Switch from an adjustable-rate mortgage to a fixed-rate

• Possibly remove mortgage insurance (if LTV is low enough)

How it Works

• You apply, get a Loan Estimate, and the home is appraised (unless the lender approves an appraisal waiver). Everything goes through underwriting for final approval.

• After closing, the new loan pays off the old one. The balance on the new loan is typically the same, or slightly increased if you roll costs into the loan or lower if you pay down principal.

• You begin payments on the new loan with the better terms.

Ideal For

• Homeowners who have no immediate cash needs from their home

• Those who plan to stay in the home long-term

• Those who have sufficient equity or want to eliminate PMI

💡 Pro Tip: Lender pricing can vary significantly between two lenders for the same loan scenario. Be sure to get Loan Estimates from at least a few lenders to compare your options side by side.

What Is a Cash-Out Refinance?

Definition

A cash-out refinance replaces your current mortgage with a new loan whose amount is larger than your existing balance — the difference is paid out to you at closing.

Primary Goals

• Access home equity in cash

• Consolidate high-interest debt

• Fund major home improvements

• Invest in real estate or other property

• Possibly restructure your debt

How it Works

• You must have enough equity (often leaving ~20% or more after closing)

• The new loan is sized to both cover your current balance + cash payout + closing costs

• Rate may be higher, term may be changed, payment may increase

• You receive the cash difference at or shortly after closing

Ideal For

• Homeowners who have substantial equity built up

• Those who need cash now for large expenses

• Those comfortable increasing their loan balance and payment

💡 Pro Tip: Cash-out refinance pricing is often higher than rate-and-term pricing, so comparing your options side by side is essential. Fincast makes it easy with a single upload of your current Loan Estimate to see if more competitive offers exist.

Key Differences at a Glance

💡Pro tip: Homeowners often discover meaningful price differences after benchmarking, sometimes in rate, sometimes in fees, and sometimes both. That’s why comparing offers side by side before committing matters more than choosing between rate-and-term or cash-out alone.

When Each Option May Make Sense

Choose Rate-and-Term if:

• You want to lower your payment or switch to a fixed rate

• You have no immediate need for cash

• You plan to stay in the home 5+ years

• You want the lowest long-term cost

Choose Cash-Out if:

• You need liquidity for something important (debt consolidation, renovation, investment)

• You have strong equity (home value significantly above current balance)

• You are OK with a higher loan balance and potentially longer amortization

• You plan to stay in the home long enough to justify the increased debt

Cost & Risk Considerations

• With a cash-out refinance, you are adding debt, potentially increasing your LTV, and possibly exposing yourself to higher interest rates and payments.

• With a rate-and-term loan, you must still cover closing costs and ensure your break-even period (the time until savings exceed costs) makes sense.

• Cash-out refinances carry a higher risk for lenders, so they often command higher pricing and stricter underwriting.

• Always evaluate:

How to Decide & Benchmark Your Offer

1. Define your primary goal: improve terms or access cash?

2. Check your equity: what is your current LTV?

3. Compare the quotes:

4. Always review your Loan Estimate and ask:

💡 Pro Tip: Already have a Loan Estimate? Upload it to Fincast—it will benchmark your rate, fees, and terms, and you’ll clearly see whether a rate-and-term or cash-out option is more advantageous.

FAQs: Rate-and-Term vs. Cash-Out

1. Can I switch from a cash-out to a rate-and-term later?

Yes — if enough equity rebuilds and your loan balance is manageable, you may be eligible to do a rate-and-term refinance.

2. Does a cash-out refinance always increase my payment?

Not always, if you also reduce the rate significantly or extend the term, but often yes because the balance is higher. That’s why comparing your options to find the most competitive deal is imperative.

3. How much equity do I need for cash-out?

Often, you must leave ~20% or more equity after closing, depending on the loan type and lender overlays.

4. Are rates for cash-out always higher than for rate-and-term?

Generally, yes — lenders view cash-out as higher risk, so rates are typically 0.25 -- 0.50% or more higher, but it varies significantly by lender, loan program, and borrower profile.

5. Which is better if I plan to move soon?

If you plan to move within 2-3 years, a rate-and-term is typically better if you’re focused on term improvement. Cash-out needs a longer horizon to justify the higher cost.

Bottom Line

If your goal is simply to improve your mortgage — lower your rate, shorten your term, or switch to a fixed rate — rate-and-term refinance is usually the wiser choice. It keeps your balance focused and your long-term interest cost lower.

If you need cash for renovations, debt consolidation, investment or large expenses — a cash-out refinance can provide it, provided you have the equity, accept a higher balance, and stay in the home long enough to make it worthwhile.

👉 Pricing, LTV requirements and lender behavior vary widely. Don’t settle for the first offer — benchmark it using Fincast to ensure you’re getting the best deal for your goals.

*Loan terms, rates, and eligibility vary by lender, loan program, and borrower qualifications.