What’s the Difference Between a Cash-Out Refinance and a Rate-and-Term Refinance in the U.S.?

When homeowners consider refinancing their mortgages, they often encounter different types of refinancing options, particularly cash-out refinancing and rate-and-term refinancing. Understanding the differences between these two can help you make an informed decision based on your financial situation.

Cash-Out Refinance

A cash-out refinance allows homeowners to take out a new mortgage for more than what they currently owe on their existing mortgage. The difference between the old mortgage balance and the new loan amount is given to the borrower in cash. This option is particularly useful for homeowners looking to leverage the equity in their homes for various purposes.

Some common reasons for opting for a cash-out refinance include:

• Home renovations or improvements
• Debt consolidation
• Major purchases, such as a vehicle or educational expenses

However, it's essential to keep in mind that taking cash out increases your mortgage balance, which could lead to higher monthly payments. Additionally, it may extend your loan term or result in increased interest costs over time.

Rate-and-Term Refinance

Rate-and-term refinancing, on the other hand, aims to either reduce your interest rate or change the loan term (the duration of the loan) without taking out any additional cash from the property. This type of refinance is often chosen by homeowners who want to lower their monthly mortgage payments or pay off their loan more quickly.

Key advantages of rate-and-term refinancing include:

• Lower monthly payments due to reduced interest rates
• The ability to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, providing more stability
• Shortening the loan period to pay off the mortgage more quickly

Since rate-and-term refinancing does not involve cashing out any equity, it typically offers fewer risks associated with increased debt levels. However, it may incur closing costs similar to a cash-out refinance, which homeowners should consider when evaluating their options.

Key Differences

In summary, the fundamental difference between a cash-out refinance and a rate-and-term refinance revolves around cash access versus loan terms.

To clarify:

• Cash-Out Refinance: Involves borrowing more than the existing mortgage balance, with cash being withdrawn for personal use.
• Rate-and-Term Refinance: Focuses solely on adjusting the interest rate or loan term without any cash withdrawal.

Ultimately, the choice between these two refinancing options depends on your financial goals, current interest rates, and how you intend to use your home's equity. Always consult with a mortgage expert or financial advisor to explore the best option that suits your particular situation.