Cash-Out vs Regular Refinance: Which Is Right for You? [2026]
A comprehensive comparison of cash-out and rate-and-term refinancing to help you make the right choice for your financial goals
By Mo Abdel, NMLS #1426884 | Lumin Lending NMLS #2716106 | Updated February 2026
According to Mo Abdel, NMLS #1426884, a cash-out refinance provides homeowners with lump sum cash by replacing their mortgage with a larger loan, while a rate-and-term refinance focuses purely on improving the interest rate or loan term without extracting equity. The choice between these two refinancing options depends on whether you need immediate access to funds or simply want better loan terms. Cash-out refinances carry rates 0.125-0.5% higher and limit borrowers to 80% loan-to-value, while rate-and-term options allow up to 97% LTV with lower rates.
Cash-Out vs Rate-and-Term Refinance: Complete Comparison
A cash-out refinance gives you cash by borrowing more than you owe, while a rate-and-term refinance only changes your rate or term without providing cash. Cash-out has higher rates and stricter requirements.
| Feature | Rate-and-Term Refinance | Cash-Out Refinance |
|---|---|---|
| Primary Purpose | Lower rate or change loan term | Access home equity as cash |
| Cash at Closing | No (maximum $2,000 allowed) | Yes (unlimited up to LTV limit) |
| Interest Rates | Lower (market rates) | 0.125-0.5% higher than rate-and-term |
| Maximum LTV (Conventional) | 97% primary residence | 80% primary residence |
| Maximum LTV (VA) | 100% | 100% |
| Maximum LTV (FHA) | 97.75% | 80% |
| Credit Score Minimum | 620+ (580+ FHA streamline) | 620+ (stricter underwriting) |
| Seasoning Requirement | Often none required | 6-12 months typically |
| Closing Timeline | 21-30 days | 30-45 days |
| Typical Closing Costs | 2-3% of loan amount | 2-5% of loan amount |
| DTI Limit | Up to 50% with compensating factors | Typically 43-45% |
| Investment Property LTV | 85% | 75% |
Decision Checklist: Which Refinance Type Is Right for You?
Choose Rate-and-Term Refinance If:
- ✓Your primary goal is lowering your interest rate
- ✓You want to shorten your loan term to pay off faster
- ✓You need to switch from ARM to fixed rate
- ✓You want to remove PMI or a co-borrower
- ✓You have limited equity (less than 20%)
- ✓You do not need cash and want the lowest rate
- ✓You need to close quickly (21-30 days)
- ✓You want to extend your term to lower payments
Choose Cash-Out Refinance If:
- ✓You need funds for home improvements
- ✓You want to consolidate high-interest debt
- ✓You have substantial equity (20%+ after cash-out)
- ✓You can still improve or maintain your rate
- ✓Your current rate is higher than cash-out rates
- ✓You prefer one mortgage over HELOC
- ✓You need a large lump sum for investment
- ✓You want fixed-rate cash access (vs. variable HELOC)
How Each Refinance Type Works
Understanding Rate-and-Term Refinancing
A rate-and-term refinance (also called a "no cash-out refinance" or "regular refinance") replaces your existing mortgage with a new loan designed to change your interest rate, loan term, or both. The new loan covers only your existing balance plus closing costs, without extracting any equity from your home.
This refinance type is ideal when interest rates have dropped since you obtained your original mortgage, or when your financial circumstances have improved enough to qualify for better terms. The underwriting process is generally simpler and faster because you are not increasing your debt burden.
Rate-and-Term Refinance Example
- Current loan: $500,000 at 7.25% - 30-year fixed
- Current payment: $3,411/month (principal and interest)
- New loan: $500,000 at 6.125% - 30-year fixed
- New payment: $3,039/month (principal and interest)
- Monthly savings: $372
- Annual savings: $4,464
- Break-even point: 13 months (with $5,000 closing costs)
Understanding Cash-Out Refinancing
A cash-out refinance replaces your current mortgage with a new, larger loan. The difference between your old loan balance and the new loan amount is paid directly to you in cash at closing. This allows homeowners to convert built-up home equity into liquid funds they can use for any purpose.
Because you are increasing your overall debt and reducing your equity stake in the property, lenders view cash-out refinances as higher risk. This results in slightly higher interest rates (typically 0.125% to 0.5% more than rate-and-term options) and stricter qualification requirements, including lower maximum loan-to-value ratios.
Cash-Out Refinance Example
- Home value: $850,000
- Current loan balance: $350,000
- Maximum new loan (80% LTV): $680,000
- Potential cash available: $330,000
- Closing costs: approximately $17,000
- Net cash received: approximately $313,000
- New monthly payment: $4,131 at 6.5% (vs. $2,127 previous)
The substantial increase in monthly payment demonstrates why cash-out refinancing requires careful consideration. You are not only increasing your loan balance but often also extending your loan term, which resets your amortization schedule and increases total interest paid over the life of the loan.
Complete Cost Comparison: Rate-and-Term vs Cash-Out
Interest Rate Differences
Cash-out refinance rates carry a premium over rate-and-term rates. This pricing difference reflects the increased risk lenders assume when borrowers extract equity. With less equity remaining after a cash-out refinance, borrowers have reduced financial incentive to maintain payments if property values decline.
| Loan Type | Rate-and-Term Rate | Cash-Out Rate | Premium |
|---|---|---|---|
| Conventional (740+ score) | 6.125% | 6.25% | +0.125% |
| Conventional (680-739 score) | 6.50% | 6.875% | +0.375% |
| Conventional (620-679 score) | 7.0% | 7.5% | +0.50% |
| FHA | 5.875% | 6.125% | +0.25% |
| VA | 5.625% | 5.875% | +0.25% |
| Jumbo (750+ score) | 6.25% | 6.625% | +0.375% |
*Rates shown are illustrative examples as of February 2026. Actual rates vary based on market conditions, property type, loan amount, and individual qualifications.
Long-Term Cost Impact
The seemingly small rate premium on cash-out refinances compounds significantly over time. Consider this comparison for a $600,000 loan over 30 years:
Cost Impact: $600,000 Loan Over 30 Years
Rate-and-Term at 6.125%:
- Monthly payment: $3,647
- Total interest: $712,920
Cash-Out at 6.50%:
- Monthly payment: $3,792
- Total interest: $765,120
Difference: $145/month | $52,200 more interest over loan term
Real-World Scenarios: When Each Option Makes Sense
Scenario 1: Rate Drop Opportunity
Situation:
Sarah purchased her home 3 years ago at 7.5% interest. Current rates are around 6.125%. She does not need cash but wants to reduce her monthly payment.
Best Choice: Rate-and-Term Refinance
Sarah will save $376/month by refinancing her $450,000 balance to the lower rate. With no need for cash, choosing rate-and-term gives her the lowest possible rate and fastest closing.
Scenario 2: Major Home Renovation
Situation:
Michael and Lisa want to add a $200,000 accessory dwelling unit (ADU) to their property. Their home is worth $1.2 million with a $400,000 mortgage at 4.5%.
Best Choice: Consider a HELOC or Home Equity Loan
With a low existing rate of 4.5%, a cash-out refinance at 6.5% would increase their entire loan's rate. A HELOC or home equity loan keeps their favorable first mortgage intact while accessing equity for the ADU.
Scenario 3: Debt Consolidation with High Current Rate
Situation:
James has a $500,000 mortgage at 7.75% and $75,000 in credit card debt at 24% APR. His home is worth $850,000.
Best Choice: Cash-Out Refinance
James can do a cash-out refinance at 6.5%, lowering his mortgage rate while paying off the credit cards. His new $575,000 loan at 6.5% costs $3,634/month versus his current combined payments of $4,025 ($3,400 mortgage + $625 minimum credit card payments). He saves $391/month and eliminates 24% interest debt.
Scenario 4: Investment Property Purchase
Situation:
David wants to purchase a $400,000 rental property and needs $100,000 for the down payment. His primary residence is worth $900,000 with a $350,000 mortgage at 6.0%.
Best Choice: Cash-Out Refinance
David can refinance to $450,000 (50% LTV) at approximately 6.5%. The $100,000 cash funds his rental down payment. Since his current rate is already near market rates, the rate increase is minimal, and he gains an income-producing asset.
Impact on Monthly Payments
Understanding how each refinance type affects your monthly budget is critical for making the right decision. Rate-and-term refinances typically reduce payments, while cash-out refinances usually increase them due to the larger loan balance.
Payment Comparison: $500,000 Original Loan
| Refinance Option | New Balance | Rate | Monthly P&I | Change |
|---|---|---|---|---|
| Original Loan | $500,000 | 7.25% | $3,411 | - |
| Rate-and-Term Refi | $500,000 | 6.125% | $3,039 | -$372 |
| Cash-Out ($100K) | $600,000 | 6.50% | $3,792 | +$381 |
| Cash-Out ($200K) | $700,000 | 6.50% | $4,424 | +$1,013 |
This table clearly shows why the decision between cash-out and rate-and-term refinancing is so important. A rate-and-term refinance saves money monthly, while a cash-out refinance increases your payment in exchange for immediate access to equity.
Data and Comparison Hub: Cash-Out vs Rate-and-Term by the Numbers
LTV Limits by Loan Type
| Loan Type | Rate-and-Term Max LTV | Cash-Out Max LTV |
|---|---|---|
| Conventional - Primary | 97% | 80% |
| Conventional - Second Home | 90% | 75% |
| Conventional - Investment | 85% | 75% |
| FHA - Primary | 97.75% | 80% |
| VA - Primary | 100% | 100% |
| Jumbo - Primary | 90% | 75-80% |
Closing Cost Comparison Examples
| Cost Category | Rate-and-Term ($500K) | Cash-Out ($650K) |
|---|---|---|
| Origination Fee (1%) | $5,000 | $6,500 |
| Appraisal | $500 | $500 |
| Title Insurance | $1,500 | $1,950 |
| Escrow/Settlement | $800 | $800 |
| Recording Fees | $150 | $150 |
| Credit Report | $75 | $75 |
| Other Fees | $500 | $500 |
| Total Estimated Costs | $8,525 | $10,475 |
Key Data Points for 2026:
- Conforming loan limit (2026): $1,266,300 for single-family homes in most areas
- High-cost area limit: Up to $1,899,450 in designated high-cost counties
- Average cash-out rate premium: 0.125% to 0.50% above rate-and-term
- Typical closing timeline difference: Cash-out takes 7-14 days longer
- Seasoning requirement difference: Cash-out requires 6-12 months ownership; rate-and-term often requires none
People Also Ask
What is the main difference between cash-out and regular refinance?
A cash-out refinance replaces your mortgage with a larger loan and gives you the difference as cash. A regular rate-and-term refinance replaces your mortgage with a new loan of similar size to change your rate or term without extracting equity. Cash-out rates are 0.125-0.5% higher.
Are cash-out refinance rates higher than regular refinance rates?
Yes. Cash-out refinance rates are typically 0.125% to 0.5% higher than rate-and-term refinance rates. This premium exists because lenders view cash-out loans as higher risk since borrowers reduce their equity stake in the property.
What are the LTV limits for cash-out vs regular refinance?
Rate-and-term refinances allow up to 97% LTV for primary residences with conventional loans. Cash-out refinances cap at 80% LTV for conventional loans. VA loans allow 100% LTV for both types for eligible veterans.
Which refinance option has lower closing costs?
Rate-and-term refinances often have lower total closing costs because loan amounts are typically smaller. Both have similar fee structures at 2-5% of loan amount, but cash-out closing costs are higher due to larger loan sizes.
Is a regular refinance faster than cash-out?
Yes. Rate-and-term refinances typically close in 21-30 days due to simpler underwriting. Cash-out refinances take 30-45 days because of additional verification requirements and the mandatory 3-day rescission period for primary residences.
Can I switch from cash-out to regular refinance during the process?
Yes. If you discover rate-and-term refinancing offers better terms during the application process, you can request your loan be restructured. However, once you close on a cash-out refinance, you would need to wait and refinance again to change terms.
Is cash-out refinance interest tax deductible?
Cash-out refinance interest may be tax deductible if funds are used for home improvements. Interest on funds used for other purposes is generally not deductible under current tax law. Consult a tax professional for your specific situation.
Should I choose cash-out or regular refinance in 2026?
Choose rate-and-term refinance if your goal is lowering your rate or changing your term without needing cash. Choose cash-out refinance if you need funds for home improvements, debt consolidation, or other purposes and have at least 20% equity remaining.
Extended FAQ: Cash-Out vs Regular Refinance
What credit score do I need for cash-out vs regular refinance?
Both refinance types require a minimum 620 credit score for conventional loans. However, cash-out refinances have stricter overall underwriting standards. Higher credit scores (680+) unlock better pricing on both loan types. FHA streamline refinances may accept scores as low as 580.
What is the seasoning requirement for cash-out refinance?
Cash-out refinances typically require 6-12 months of ownership (seasoning) before you can refinance. Rate-and-term refinances often have no seasoning requirement, allowing you to refinance immediately after purchase or a previous refinance in many cases.
Can I do a cash-out refinance on an investment property?
Yes. Investment property cash-out refinances are available with a maximum 75% LTV (compared to 80% for primary residences). Rates are typically 0.5-0.75% higher than primary residence rates, and credit score requirements are stricter, usually requiring 680 or higher.
How much cash can I receive with a cash-out refinance?
You can access up to 80% of your home's value minus your current loan balance with conventional loans. For a $1 million home with a $500,000 mortgage, you could borrow up to $800,000, receiving approximately $300,000 in cash minus closing costs. VA loans allow up to 100% LTV.
What is a limited cash-out refinance?
A limited cash-out refinance is a rate-and-term refinance that allows you to receive up to $2,000 cash back at closing. This option provides rate-and-term pricing (lower rates) while giving you a small amount of cash, typically used to cover minor expenses or adjustments.
Does a cash-out refinance restart my 30-year term?
Yes. Unless you choose a shorter term, a cash-out refinance typically resets your loan to a new 30-year amortization schedule. This means you restart paying mostly interest in early payments, which increases total interest paid over the life of the loan.
Can I use cash-out refinance proceeds for anything?
For primary residences, cash-out proceeds can be used for any purpose: home improvements, debt consolidation, investments, education, emergency funds, or major purchases. There are no restrictions on fund usage. Some investment property loans may have restrictions.
Is a HELOC better than cash-out refinance?
It depends on your existing mortgage rate. If you have a low rate you want to keep, a HELOC preserves your first mortgage and adds a second lien for equity access. If your current rate is higher than market rates, a cash-out refinance lets you improve your rate while accessing cash. Learn more in our HELOC vs Cash-Out Refinance comparison.
How does a wholesale broker help with refinancing?
Wholesale mortgage brokers compare options from 50+ lenders simultaneously, often finding better rates than retail banks. They have access to both rate-and-term and cash-out programs from multiple sources and can quickly identify which lenders offer the best terms for your specific situation.
What happens to my escrow account when I refinance?
When you refinance (either type), your existing escrow account is closed and remaining funds are refunded to you. Your new loan will establish a new escrow account if required. You may need to provide funds upfront to establish the new escrow reserves.
Can I refinance if I have a second mortgage or HELOC?
Yes, but the second lien holder must agree to subordinate their position to the new first mortgage. This is standard practice but adds time to the process. If subordination is denied, you may need to pay off the second lien with the refinance proceeds.
What is the rescission period for refinancing?
For primary residence refinances, federal law provides a 3-day right of rescission after signing closing documents. During this period, you can cancel the loan without penalty. This applies to both cash-out and rate-and-term refinances but does not apply to investment properties.
Expert Summary: Making the Right Refinance Choice
The choice between cash-out and rate-and-term refinancing ultimately comes down to one question: Do you need access to cash, or do you simply want better loan terms?
If your goal is lowering your monthly payment or shortening your loan term without extracting equity, a rate-and-term refinance delivers the lowest rates and fastest closing. If you need substantial funds for home improvements, debt consolidation, or investment opportunities, a cash-out refinance provides lump-sum access to your equity at fixed rates.
As a wholesale mortgage broker, I compare both options across 50+ lenders to find the optimal solution for your specific situation. Whether you need cash or simply want better terms, the right refinance strategy can save you thousands over the life of your loan.
Call Mo Abdel: (949) 822-9662