Rate-and-Term vs. Cash-Out Refinancing

Let’s take a look at the two basic choices when refinancing your mortgage: rate-and-term and cash-out. By weighing the benefits of each, you can better understand which mortgage refinance option works best for your financial goals.

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The benefits of rate-and-term refinancing

Also known as a traditional refinance, rate-and-term refinancing changes the rate and/or term of your existing mortgage. It pays off your original loan and replaces it with a new mortgage. Typically, the new mortgage has a rate and/or term that’s better suited to your financial goals. This type of refinancing is ideal when you want to take advantage of lower interest rates or lower your monthly payments for more financial flexibility.

Lower your interest rate

Refinancing to a lower interest rate than the one you currently have could save you thousands over the life of your loan. If rates are lower it is worth taking a look into.

Lower monthly payments

Refinancing to a longer term can reduce your monthly payments and free up funds for other expenses. Keep in mind you’ll pay more in interest over the lifetime of the loan.

Pay off your loan faster

By refinancing to a shorter loan term, you can build your home equity faster and pay your loan off sooner. Your monthly mortgage payments will likely be higher, but you end up paying less in interest over the life of your loan.

The benefits of cash-out refinancing

Cash-out refinancing lets you draw on your home’s equity and use it as a financial tool. You can turn equity into cash while making changes to your loan rate and term at the same time. As in rate-and-term refinancing, a new loan replaces your existing mortgage, but the amount of cash you take out gets added to the loan balance. The difference is then paid out to you as a lump sum payment at closing. This type of refinancing is helpful if you need extra cash for home improvements, paying off high-interest debt or even college expenses.

Pay for large expenses

The money you take out can be put toward other costs or a big project, such as renovations that could boost your home’s value.

Get a bigger tax deduction

You can also use cash-out refinancing to pay off non-deductible debts. Since mortgage interest is tax-deductible, this may qualify you for a larger tax refund. Speak to your tax advisor for guidance.

Consolidate your debts

This type of refinancing can help you take out money to pay off a lot of high-interest debts at once. With a cash-out refinance rate, you can then move that debt into a single monthly payment with lower interest.

Which type is right for you?

A rate-and-term refinance helps you achieve different things than a cash-out refinance. What makes sense for you will depend on your reasons for refinancing and whether you meet the requirements. For example, if you want to do cash-out refinancing, you’ll need to build enough equity in your home and get a home appraisal. Identifying your goals and speaking to one of our mortgage representatives will help you narrow down the choice.