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When it comes to refinancing your mortgage, you have more than one option to help achieve your financial goals. The two main types of refinance — rate-and-term and cash-out — offer unique benefits depending on your needs. Whether you’re looking to lower your monthly payments or tap into your home’s equity for extra cash, understanding these choices can help you make the right move for your situation.
The two types of refinance programs include rate-and-term and cash-out, as mentioned. The option you choose depends on your financial goals. Let’s get into more detail about each.
| Rate-and-Term Refinance | Cash-Out Refinance | |
| Purpose | Lower rate or change terms | Access equity as cash |
| Typical Interest Rate | Lower | Slightly higher (+0.125%) |
| Best For | Saving money long-term | Funding major expenses or debt |
When you refinance your mortgage solely to reduce the rate or to improve the terms of your mortgage, you are doing a “rate and term refinance.”
This means that your goal is not to take cash out of your home’s equity. Refinancing from a 30-year loan into another 30-year loan with a rate .5% lower than your present rate would be one example of a rate and term refinancing. Switching from an adjustable-rate mortgage to a fixed-rate would be another. Refinancing from a 30-year loan into a 15-year loan would be another.
When you refinance to pull some significant amount of cash out of your equity, you are doing a “cash-out refinance.” The rate on this type of refinance will be approximately .125% higher than for a rate and term loan.
Your loan can be considered a cash-out refinance even if you don’t walk away with cash at closing. This typically happens when you have a second mortgage or a Home Equity Line of Credit (HELOC) that was added after your home purchase. If you refinance to combine both loans into one, it’s considered a cash-out transaction—even without receiving any funds upfront.
A lender looks at your property as security for the loan they will give you. They are always concerned about the Loan To Value Ratio (LTV). The LTV is the loan amount as a percentage of your home’s appraised value.
If the appraiser says your home is worth $500,000 and you are looking for a $400,000 loan, your LTV is 80% ($400,000 is 80% of $500,000). When you begin a refinance, you want to be confident that your home’s value will support the loan you want.
Doing a cash-out refinance depends largely on if you have the appraised value and equity to take out the amount you want to borrow. Even the details of a rate and term refinance can change depending on whether home values have gotten significantly higher or lower since your last mortgage began.
The only sure way to find out the appraised value is to have your loan officer order an appraisal. This will cost around $500—and you’ll pay for the report in advance.
If you have any doubts about your property’s value, you can get a Home Valuation Report (HVR) from Sammamish Mortgage at no cost to you before paying for the full appraisal. The HVR is not a substitute for a full appraisal, but the HVR can give you some insight in advance about your home’s value.
There is no cost to you for this valuable report; it’s yours for the asking, and you’ll receive it instantly.
Once you’ve decided which kind of refinance suits you, you’ll need to follow through on the rest of the process. Download our ebook to find out exactly how to refinance before mortgage rates go up.
Will you need mortgage financing to buy a home? At Sammamish Mortgage, we offer a wide variety of mortgage programs and tools with flexible qualification criteria, including our Diamond Homebuyer Program, Cash Buyer Program, and Bridge Loans. We serve borrowers in Washington, Oregon, Colorado, Idaho, and California. Please contact us today with any financing-related questions you have, or visit our website to get an instant rate quote.
How is rate-and-term refinancing and cash-out refinancing different?
Rate-and-term focuses on improving loan terms; cash-out adds borrowing power by tapping into home equity.
Do both types pay off my current mortgage?
Yes. Both refinance types pay off your existing loan and replace it with a new one.
Can I use either option to switch from a variable to a fixed rate?
Yes. Both allow you to change your loan type—fixed, variable, or hybrid.
Which option usually has lower interest rates?
Rate-and-term refinances typically offer lower rates than cash-out refinances.
Does cash-out refinancing increase my mortgage balance?
Yes. You’re borrowing more than you owe, so your new loan amount will be higher.
Can rate-and-term refinancing reduce my monthly payment?
Yes, especially if you secure a lower interest rate or extend the loan term.
Is cash-out refinancing more expensive?
It can be. Higher loan amounts and risk may lead to higher rates and closing costs.
How much equity do I need for a cash-out refinance?
Most lenders require at least 20% equity after the cash is withdrawn.
Whether you’re buying a home or ready to refinance, our professionals can help.
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No Obligation and transparency 24/7. Instantly compare live rates and costs from our network of lenders across the country. Real-time accurate rates and closing costs for a variety of loan programs custom to your specific situation.