When people say "refinance," they usually mean one of two things. A rate-and-term refinance changes the rate, the term, or both on your existing balance. A cash-out refinance replaces your mortgage with a larger one and gives you the difference in cash. They use the same basic process, but they solve very different problems — and they're underwritten differently, too.
Rate-and-term refinance: changing how you pay what you owe
With a rate-and-term refinance, your new loan amount is roughly the same as your current balance (sometimes with closing costs included). You're not pulling equity out — you're changing the terms of the debt you already have.
Common reasons homeowners choose it:
- Lowering the interest rate when market conditions allow
- Shortening the term, such as moving from 30 years to 15 or 20
- Moving from an adjustable rate to a fixed rate for more predictable payments
- Moving from an FHA loan to a conventional loan, which may allow removal of mortgage insurance depending on equity and eligibility
Because you aren't increasing your debt, rate-and-term refinances often have more flexible equity requirements than cash-out refinances. Exact guidelines depend on the loan program.
Cash-out refinance: turning equity into cash
A cash-out refinance pays off your existing mortgage with a new, larger loan. The difference — minus closing costs — comes to you at closing. Homeowners commonly use the funds for:
- Home improvements, renovations, or an ADU (accessory dwelling unit)
- Consolidating higher-interest debt into one payment
- Major expenses like education costs
- Investment or business purposes (some programs have specific rules here)
Because you're borrowing more against the home, lenders typically cap how much of your home's value you can borrow against, and there may be stricter credit or seasoning requirements. "Seasoning" simply means how long you've owned the home or had the current loan.
The tradeoff with cash-out: your first mortgage rate
Here's the part that matters most for a lot of Southern California homeowners: a cash-out refinance replaces your entire first mortgage. If your current rate is meaningfully lower than what's available today, a cash-out refinance means giving that rate up on your whole balance — not just the new cash.
In that situation, a HELOC or home equity loan can let you access equity while leaving your first mortgage untouched. We compare the two in detail in HELOC vs. Cash-Out Refinance.
Side-by-side
- Loan amount: Rate-and-term stays close to your current balance. Cash-out increases it.
- Goal: Rate-and-term changes the terms. Cash-out gives you access to equity.
- Equity requirements: Rate-and-term is generally more flexible. Cash-out typically has lower maximum loan-to-value limits.
- Pricing: Cash-out loans may be priced differently than rate-and-term loans, depending on the program and your profile.
- Payments: Both result in one mortgage payment.
Questions that point you in the right direction
- Do I need cash, or do I just want a better payment or term?
- How does my current rate compare with what's available today?
- If I need cash, do I need it all at once, or over time?
- How long do I plan to stay in the home? (Our break-even guide helps here.)
One note: we can explain how loans are structured, but if you're using cash-out funds for a business or investment, or you're wondering about tax treatment of mortgage interest, check with a tax professional. That's outside what we can advise on.
Frequently asked questions
How much cash can I take out with a cash-out refinance?
It depends on your home's appraised value, your current balance, and the maximum loan-to-value allowed by the loan program. Credit, income, and property type also play a role. We can estimate a range once we know your numbers.
Can I roll closing costs into a rate-and-term refinance?
In many cases, yes, subject to the program's loan-to-value limits. Rolling costs in increases your loan balance, so it's worth comparing that against paying them up front.
Is a cash-out refinance better than a HELOC?
Neither is automatically better. A cash-out refinance gives you one payment but replaces your current first mortgage. A HELOC adds a second payment but leaves your first mortgage in place. Your current rate and how you'll use the funds usually decide it.
Do I need an appraisal to refinance?
Many refinances require an appraisal, especially cash-out refinances. Some programs may offer alternatives depending on the loan and property. We'll tell you what applies to your situation up front.