Refinance vs Cash-Out Refinance

Two kinds of refinance

Refinancing means replacing your current mortgage with a new one. There are two main types. A rate-and-term refinance changes your interest rate, loan term, or both, without taking significant cash out. A cash-out refinance replaces your mortgage with a larger loan and gives you the difference in cash.

Both can be useful tools, but they serve different goals and carry different costs and risks.

Rate-and-term refinance

People choose a rate-and-term refinance to lower their interest rate, reduce their monthly payment, shorten their term to pay off the loan faster, switch from an adjustable rate to a fixed rate, or remove mortgage insurance once they have enough equity.

Whether it makes sense depends on how much you'll save compared with the cost of refinancing. A simple break-even calculation helps: divide your total closing costs by your monthly savings to see how many months it takes to recover the cost. If you plan to stay in the home longer than that, the refinance may be worth it. Our refinance calculator can help you estimate it.

Cash-out refinance

A cash-out refinance lets you tap your home's equity. Homeowners commonly use the funds for renovations, paying off higher-interest debt, education costs, or investing in other real estate. Because the new loan is larger, your balance increases, and your payment may go up even if your rate is similar.

How much cash you can take depends on your home's value, your current balance, and the program's maximum loan-to-value, which varies by lender and loan type. Investors can use DSCR or conventional cash-out refinances on rental properties, and eligible veterans may use a VA cash-out refinance.

Costs to consider

Both types of refinance involve closing costs such as lender fees, appraisal, title and escrow. Cash-out refinances may have pricing adjustments compared with rate-and-term loans. Restarting a 30-year term can lower your payment but increase total interest over time, so consider a shorter term if it fits your budget.

Alternatives to cash-out

If you have a great rate on your current mortgage, replacing it entirely with a cash-out refinance may not be ideal. A home equity line of credit (HELOC) or home equity loan lets you borrow against equity while keeping your first mortgage. HELOCs often have variable rates and work like a revolving line. Comparing a cash-out refinance with a HELOC side by side is often worthwhile.

Debt consolidation: use with care

Using a cash-out refinance to pay off credit cards or other high-interest debt can reduce your total monthly payments. But it converts unsecured debt into debt secured by your home and can extend repayment over many years. It works best when paired with a plan to avoid building new balances.

The process

The refinance process is similar to a purchase: application, documentation, appraisal, underwriting and closing. For a primary residence, there's typically a three-business-day right of rescission after signing before the loan funds. Tax treatment of mortgage interest depends on how you use the funds, so consult a tax professional.

How to decide

Start with your goal. If you want a lower payment or faster payoff, compare rate-and-term options and the break-even point. If you need funds, compare a cash-out refinance with a HELOC. Let's review your current loan and run the numbers together.