Rate-and-Term vs Cash-Out Refinance

Q: Which one gets the better rate?

Rate and term, essentially always. A cash-out refinance prices higher because you are increasing the loan against the property and taking equity off the table, which is more risk for the lender. If your only goal is to lower the payment or move off a maturing loan, take the rate and term. Ask for cash out only if you have a use for the money that earns more than it costs.

Q: Does taking cash out reset my loan term?

Usually yes, and that is the cost people miss. Refinancing into a new 30-year loan restarts the amortization clock, so a property you were eight years into paying down goes back to year one. The rate you compare is only half the decision. The other half is how many more years of interest you just signed up for, which is why a second loan behind the first is sometimes the better structure.

Keep the balance close, or pull equity out at closing.

You already own the property and you are replacing the loan, so the real question is how you size the new one. A rate-and-term refinance keeps the balance close to what you owe now and buys you a better rate, a longer term, or an exit from short-term debt. A cash-out refinance raises the balance above the payoff and returns the difference to you at closing, capital for your next deal. Because this is an investment property, the rent has to cover whichever payment you choose, so the real test is whether you have a funded use for the cash that beats the cost of carrying the bigger loan.

Rate-and-Term Refinance

Payoff and rate reset

Cash-Out Refinance

Payoff plus equity draw

Loan purpose

Pay off the existing loan

Pay off and pull equity

Cash at closing

Incidental only

Proceeds for any purpose

New loan size

Near the current payoff

Payoff plus the draw

Common trigger

Bridge exit or better rate

Funding the next deal

USAM DSCR leverage

Up to 80% LTV

Freddie 1-unit cap

85% LTV

75% LTV

Bottom line

Rate-and-term costs less because you are not adding debt: take it for the rate, the term, or an exit from short-term money on schedule. Cash-out is worth the bigger payment only when the proceeds have a job waiting. USA Mortgage's DSCR loan states one leverage figure, up to 80% LTV, for either transaction, so the choice is about the payment you take on rather than the leverage you give up. Run the higher payment against actual rent before you decide how much to draw.

Rates and terms shown are typical figures, subject to underwriting and market conditions. Not a commitment to lend.

Common questions

Which one gets the better rate?

Rate and term, essentially always. A cash-out refinance prices higher because you are increasing the loan against the property and taking equity off the table, which is more risk for the lender. If your only goal is to lower the payment or move off a maturing loan, take the rate and term. Ask for cash out only if you have a use for the money that earns more than it costs.

How much equity do I need to leave in?

Plan on 20% on our programs, since both DSCR and conventional investment cap at 80% LTV. That cap applies to the new total loan, so on a cash-out it sets your ceiling directly: a property worth $500K supports a new loan up to $400K, and whatever is left after paying off the existing loan and costs is what you actually receive.

Does taking cash out reset my loan term?

Usually yes, and that is the cost people miss. Refinancing into a new 30-year loan restarts the amortization clock, so a property you were eight years into paying down goes back to year one. The rate you compare is only half the decision. The other half is how many more years of interest you just signed up for, which is why a second loan behind the first is sometimes the better structure.

What counts as a rate-and-term refinance instead of a cash-out?

A rate-and-term refinance pays off your existing loan and closing costs, with only incidental cash reaching you. Fannie Mae's limited cash-out rule caps that cash at the greater of 1% of the new loan amount or $2,000. A cash-out refinance carries no such cap, and the proceeds can fund your next deal or anything else.

Does taking cash out change the loan terms on a rental?

It raises the loan balance, so the same rent has to cover a larger payment. USA Mortgage states one DSCR max leverage figure, up to 80% LTV, for rate-and-term and cash-out alike, with rates from 5.50% IO, subject to underwriting. Freddie Mac's published caps for a 1-unit investment property do price cash-out tighter, 75% LTV against 85% for a no cash-out refinance, though that split is Freddie Mac's agency rule, not a USA Mortgage term.

Related comparisons

DSCR Cash-Out vs Conventional Cash-OutTwo ways to pull equity out of a rental you own.Bridge Loan vs DSCR LoanShort-term capital to reposition, then long-term money to hold.

Still not sure which fits?

Tell us about your deal and we'll point you to the right structure. No obligation.

Apply now Talk to us