The Two Types of Refinance: Rate-and-Term vs. Cash-Out

What it is

Refinances come in two main forms, and they do very different things to your loan balance:

• Rate-and-term refinance changes the terms of the loan — the interest rate, the length, or both — without handing you any cash. The balance stays about the same (aside from costs).
• Cash-out refinance replaces your loan with a larger one and gives you the difference in cash. Your balance goes up by the amount you take out.

How it works

Rate-and-term. The new loan pays off the old one for roughly the same amount you still owe, then continues on new terms. A borrower might move from a 30-year to a 15-year term, or from one rate to another. Because no equity is withdrawn, the amount owed doesn’t jump — the goal is to reshape the loan, not to extract money.

Cash-out. Suppose you owe less than your home is worth — that gap is your equity. In a cash-out refinance, the new loan is written for more than your current payoff, the old loan is cleared, and the extra amount is paid to you in cash. That cash comes at a cost: your total balance is now larger, and you’ll typically pay interest on it over a fresh loan term. Lenders limit how much you can take out, usually leaving a cushion of equity in the home.

Both types carry closing costs (commonly ~2–5% of the loan amount) and both fully replace your existing mortgage, including its rate.

What affects it / How to think about it

Effect on balance and payment

• Rate-and-term: balance roughly flat; payment moves based on the new rate and term.
• Cash-out: balance rises; payment usually rises too, both because the balance is bigger and because the whole loan takes on the new rate.

Typical use cases

• Rate-and-term is generally considered when the aim is to change the rate or the payoff timeline.
• Cash-out is generally considered when the aim is to access a lump sum of equity — for home improvements, consolidating other debt, or other large needs.

Trade-offs to weigh

• A cash-out refinance re-prices your entire mortgage at the current rate. If you’re holding a low existing rate, this is a significant trade-off: you’d give up that low rate on the whole balance just to access equity. In that situation, borrowing against equity without refinancing the first mortgage — such as a HELOC (a line of credit secured by your home equity) or second mortgage — keeps the original low-rate loan intact. Which approach costs less depends on the numbers.
• Any refinance that resets to a new full term can increase total interest paid over the life of the loan, even if the monthly payment looks similar.
• Cash-out increases the amount secured by your home, which raises the stakes if your circumstances change.

The CFPB notes that cash-out refinancing turns home equity into debt secured by the home, and encourages comparing it against other ways of borrowing before deciding.