Rate-and-Term vs Cash-Out Refinance: Which Should You Pick?

March 30, 2026·5 min read

There are two main reasons homeowners refinance: to lower their payment, or to pull cash out of their home equity. The two flavors — rate-and-term and cash-out — have very different costs, rates, and risks.

Rate-and-term refinance

You replace your existing mortgage with a new one at a better rate or different term length. The loan balance stays roughly the same.

Goal: lower monthly payment, switch from ARM to fixed, or shorten the term
Rate: typically 0.25–0.75% lower than cash-out
Equity needed: as little as 3–5%

Cash-out refinance

You take out a new mortgage larger than your current balance and pocket the difference in cash.

Goal: fund renovations, consolidate higher-interest debt, or invest
Rate: higher than rate-and-term (lender takes more risk)
Equity needed: typically 20%+ remaining after the cash-out

How to decide

Ask yourself one question: "Do I just want a lower payment, or do I need cash for a specific purpose?"

Just want lower payment → rate-and-term
Renovating a kitchen or paying off 22% credit card debt → cash-out may make sense, but compare against a HELOC first
Want to invest the cash in the stock market → almost never a good idea

Watch the loan-to-value ratio

Cash-out refinances are capped at 80% LTV on conventional loans (85% on FHA, 90%+ on VA). Pulling out too much cash means a higher rate and worse terms.

The bottom line

If your only goal is to capitalize on lower rates, stick with rate-and-term. Set a target rate alert and refinance the moment the market reaches it.