When refinancing a mortgage, essentially, you have two choices. If you refinance your existing loan to get a lower interest rate or change the terms, it is called a rate-and-term refinance. If you want to extract some of the equity in your home—perhaps to do a renovation, pay down debts, or help pay college costs—you may take a cash-out loan.
But it’s important to understand how these two refinance options can affect your financial position.
- The basic options when refinancing a mortgage are a cash-out, or rate-and-term refinance.
- You can extract some of the equity in your home with a cash-out refi.
In a rate-and-term refinance, you exchange the current loan for one with better terms.
- Cash-out loans generally come with added fees, points, or a higher interest rate, because they carry a greater risk to the lender.
- It may be possible to extract some cash from your refinance without incurring the extra fees of a cash-out loan by taking advantage of the overlap of funds at the end of one loan and the beginning of another.