There are two main categories of mortgage refinancing, and understanding the difference helps clarify which option fits your financial goals.
Rate-and-Term Refinance
This is the more straightforward option: you refinance your existing loan balance into a new loan with a different interest rate, loan term, or both. No additional cash is taken out — the goal is purely to improve your loan’s terms.
Cash-Out Refinance
With a cash-out refinance, you borrow more than your current mortgage balance and receive the difference in cash at closing. This effectively converts home equity into accessible funds, often used for renovations, debt consolidation, or major expenses.
Key Differences
- Loan amount: Rate-and-term keeps the balance roughly the same; cash-out increases it.
- Interest rates: Cash-out refinances often carry slightly higher rates due to increased lender risk.
- Purpose: Rate-and-term is about improving loan terms; cash-out is about accessing equity.
- Equity impact: Cash-out refinancing reduces your home equity since you’re borrowing against it.
Which One Is Right for You?
If your only goal is a better rate or different loan term, a rate-and-term refinance is typically the simpler and cheaper option. If you need funds for a specific purpose and have significant equity built up, a cash-out refinance may make sense — as long as you’re comfortable with a larger loan balance.
The Bottom Line
Both types of refinancing serve different purposes. Clarifying your primary goal — better terms versus accessing cash — will point you toward the right choice.