Unlocking your home’s potential: cash-out refinance vs. rate and term refinance

When you refinance your mortgage, you replace your existing loan with a new one that may have different terms, such as a lower interest rate, a shorter loan term, or other benefits tailored to your financial goals. The two primary types of refinances available are a “cash-out” refinance and a “rate and term” refinance.

Cash-out refinance

A cash-out refinance allows you to access a portion of your home’s equity by replacing your existing mortgage with a larger loan. The new loan pays off your current balance, and the remaining equity is paid to you in cash.

The amount you can access depends on your home’s current value, your existing loan balance, your credit profile, and program guidelines. Most loan programs allow you to borrow up to a certain percentage of your home’s value, known as the maximum loan-to-value (LTV).

Homeowners commonly use a cash-out refinance for:

• Home renovations or improvements
• Paying off higher-interest debt
• Purchasing additional real estate
• Funding business ventures
• Building liquidity or strengthening cash reserves

When used strategically, a cash-out refinance can be an efficient way to convert your home’s equity into usable capital. The key is having a clear plan for how the funds will be used.

Rate and term refinance

A rate and term refinance replaces your existing mortgage with a new one that better fits your financial needs. This could mean securing a lower interest rate, extending the loan term, shortening the loan term, or removing mortgage insurance (MI or PMI). Here are a few examples of how a rate and term refinance might benefit you:

• Lower interest rate: If your current mortgage has a 7.6% interest rate (7.7% APR) and you refinance to a 5.75% interest rate (5.85% APR), your monthly payment would decrease, assuming all other factors remain the same.*
• Extend the loan term: If your current mortgage has 22 years remaining, refinancing into a new 30-year loan can lower your monthly payment by spreading the remaining balance over a longer period.
• Shorten the loan term: Refinancing into a shorter loan term, such as moving from a 30-year mortgage to a 15-year mortgage, can save you a substantial amount in interest over the life of the loan. Often, 15-year terms come with lower interest rates than 30-year loans, adding to your savings. While your monthly payment may be higher, the long-term benefits can make it a smart financial move.
• Removing mortgage insurance: If you purchased your home with less than 20% down, you might be paying monthly mortgage insurance. However, if your home’s value has increased and you’ve built 20% equity, refinancing into a new conventional loan can eliminate this monthly expense.

*Please note that the interest rate mentioned is for illustrative purposes and may not represent current market rates.

When to consider refinancing

Refinancing isn’t the right choice for everyone. For example, if you already have a very low interest rate or don’t need to access your home’s equity, refinancing might not be the best option for your situation. At Solcosta Home Loans, we can help you determine if refinancing makes sense based on your short and long-term financial goals – and if refinancing doesn’t make sense, we will tell you. Feel free to contact us for a comprehensive discussion of your options or to request a free, personalized rate quote.

Working with Solcosta Home Loans

• Since we are a mortgage broker and not a bank, we have the ability to shop multiple lenders to get you the best deal possible.
• We offer a wide variety of loan products, and we can help you find the loan that is right for you!
• We are fast and efficient and have the ability to close most of our loans in 18 days or less.
• We are locally owned and operated in Northern California. That means when you call or email us, you will be speaking with us directly.