Refinancing usually comes down to two main options: rate-and-term or cash-out. A rate-and-term refinance changes your interest rate, loan term, or loan type without focusing on taking equity out as cash. A cash-out refinance uses your home equity to replace your current mortgage with a larger loan and give you funds at closing, or to roll other housing debt into the new loan. The right choice depends on your goal, whether that is lowering your rate or payment, changing your term, consolidating mortgage debt, or accessing equity.
The two main refinance types are rate-and-term and cash-out. The difference is not just the name of the loan, but what you want the new mortgage to accomplish. If your priority is improving the loan you already have, a rate-and-term refinance may fit better. If your priority is turning home equity into usable funds or combining mortgage-related debt into one new loan, a cash-out refinance may be the better match.
| Rate-and-Term Refinance | Cash-Out Refinance | |
| Purpose | Lower rate or change terms | Access equity as cash |
| Best For | Saving money long-term | Funding major expenses or debt |
A rate-and-term refinance is for borrowers who want to improve the structure of their mortgage rather than pull equity out of the home. The new loan may lower your interest rate, change your repayment term, or switch your loan type.
For example, refinancing from a 30-year loan into another 30-year loan with a rate .5% lower than your present rate would be one type of rate-and-term refinance. Switching from an adjustable-rate mortgage to a fixed-rate loan would be another. Refinancing from a 30-year loan into a 15-year loan also falls into this category.
This option often makes sense when your main goal is to reduce interest costs, lower your monthly payment, gain more predictable terms, or pay the loan off faster. The tradeoff to watch is that the loan still has closing costs, and changing the term can affect your payment. For example, extending the term may lower the payment but increase the total interest paid over time, while shortening the term may save interest but raise the monthly payment.
A cash-out refinance is for borrowers who want their new mortgage to do more than replace the old one. In addition to paying off the existing loan, the new loan is structured to let you access equity as cash or to consolidate certain housing-related debt into one mortgage. Cash-out refinances may have different pricing or qualification requirements than rate-and-term refinances.
This option commonly makes sense when your goal is to fund a major expense, pay off debt tied to the home, or simplify multiple mortgage payments into one. 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.
The tradeoff to watch is that using equity can leave you with less cushion in the home, and the larger loan amount can affect your payment and qualification. Even when the refinance solves another financial goal, it is important to weigh that benefit against the cost of replacing your current mortgage.
If your main goal is to lower your rate, reduce your monthly payment, move from an adjustable rate to a fixed rate, or change from a 30-year loan to a 15-year loan, a rate-and-term refinance is usually the better fit.
If your main goal is to access equity, pay for a major expense, or combine your first mortgage with a second mortgage or HELOC into one new loan, a cash-out refinance is usually the better fit.
If more than one goal applies, focus first on what matters most: improving the terms of your current mortgage or using your equity. That distinction usually determines which refinance structure you should explore with a loan officer.
Your home equity and appraised value play a major role in whether a refinance works the way you want it to. A lender looks at your property as security for the loan they will give you, which is why they pay close attention to 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.
Equity matters most in a cash-out refinance because the amount you can borrow depends largely on how much value is available in the home after accounting for your existing mortgage balance. If the appraised value comes in lower than expected, you may not be able to take out as much as you planned, or the loan may not fit the terms you wanted.
Equity also affects rate-and-term refinancing. Even if you are not taking cash out, your current value can influence the options available to you and whether the refinance still helps you meet your payment or term goals.
The only sure way to find out the appraised value is to have your loan officer order an appraisal. Appraisal costs can be part of your refinance expenses.
If you are planning a refinance and are unsure about your property’s value, getting an early estimate can help you judge whether your goals are realistic before you pay for a full appraisal. That can be especially helpful if you are considering a cash-out refinance or trying to reach a specific LTV.
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 it can give you some insight in advance about your home’s value.
There is no cost to you for this report, 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.
Sammamish Mortgage can help. We serve clients across Washington, Idaho, Colorado, Oregon, and California. Since 1992, we’ve been providing several mortgage programs and products with flexible qualification criteria to borrowers across the Pacific Northwest. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, reach out to us if you have refinance questions or want to discuss your options with a loan officer.
Rate-and-term refinancing focuses on changing your interest rate, loan term, or loan type without emphasizing cash back. Cash-out refinancing replaces your current mortgage with a larger loan so you can access home equity as cash or roll certain housing-related debt into the new loan.
Yes. Both refinance types pay off your existing loan and replace it with a new one.
Yes. A refinance can be used to change your loan type, such as moving from an adjustable-rate mortgage to a fixed-rate loan.
Rate-and-term refinances typically have different pricing than cash-out refinances and often offer lower rates.
Yes. Because the new loan is larger than the amount needed to pay off your current mortgage, your new loan balance is usually higher.
Yes, especially if you secure a lower interest rate or extend the loan term. Keep in mind that extending the term can increase the total interest paid over time.
It can be. Cash-out refinances may have different pricing or qualification requirements than rate-and-term refinances, and the larger loan amount can also affect your payment.
The amount you can borrow depends largely on your home equity, your appraised value, and the lender’s loan-to-value requirements. If the appraised value comes in lower than expected, you may not be able to take out as much as you planned.
A rate-and-term refinance is usually the better fit when your main goal is to lower your rate, reduce your monthly payment, change your term, or move from an adjustable rate to a fixed rate rather than use home equity.
That is typically treated as a cash-out refinance, even if you do not receive cash at closing. This can happen when you refinance a first mortgage together with a second mortgage or HELOC into one new loan.
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