Rate & Term Versus Cash Out Refinance Loan

Last Updated 6/11/2015

Which is the best refinance loan for you; cash out mortgage, or rate and term loans?

There are several forms of refinance loan available to today’s homeowners. So how are they different? Which type will best help you achieve your financial and financing goals?

Rate & Term Refinance Loans

A ‘rate and term’ refinance loan does just as the name suggests. It is a new mortgage loan which is used to optimize the interest rate and term of your home loan to fit your financial needs and goals.

These refinance loans can be used to reduce interest rates and, or monthly payments, and sometimes both. Perhaps rates have dropped and you can save money each month, and pay off your home loan earlier by refinancing and lower your mortgage interest rate. Or maybe you have seen equity grow and can refinance to eliminate extra expenses such as mortgage insurance. Or maybe you are in a crunch and would like to spread out your payments and reduce the monthly financial burden.

This loan won’t give you cash in your hand to spend, but normally comes with the best loan rates, and is easier and faster to obtain.

Cash Out Refinance Loans

A cash out mortgage can provide homeowners with cash from their equity for any number of needs and wants. As with the above a cash out refinance will mean changing the rates and term left on your loan, but can also put money in your hand.

Potential uses for cash out mortgage might include; funding home improvements, college education, medical emergencies, making investments, and consolidating other debts to lower overall interest and monthly payments.

Depending on the individual scenario, and especially when LTVs are high, and credit isn’t so great, cash out loans may come with slightly higher rates. Some refinance loan programs don’t permit cash out.

More Mortgage Loan Alternatives

A hybrid refinance loan option which can offer the best of both worlds is a debt consolidation or ‘limited cash out’ refinance loan. Depending on the individual loan this can provide a minimal dollar figure, or up to 2% of the loan in cash back. Or better terms may be obtained if funds are directly distributed and paid to third parties (such as credit cards, or contractors) at closing.

More options may include a second mortgage to get cash out, or a home equity line of credit (HELOC) to both improve rates and terms on current financing, and provide a flexible, revolving line of credit.