"Refinance" covers two genuinely different transactions that happen to use the same paperwork. A rate-and-term refinance replaces your existing mortgage with a new one to get a better rate or different term, without changing the balance beyond closing costs. A cash-out refinance replaces the mortgage with a larger one and hands you the difference in cash. They're priced differently, underwritten differently, and solve different problems.
Rate-and-term refinance
The straightforward version: you owe roughly what you owed before (plus any rolled-in closing costs), just under new terms. People do this to:
- Lower the interest rate when market rates have dropped since the original loan.
- Shorten the term — moving from a 30-year to a 15-year to build equity faster and pay less total interest.
- Remove FHA mortgage insurance by refinancing into a conventional loan once equity and credit support it.
- Switch from an adjustable rate to a fixed rate before a rate reset.
Because the loan-to-value ratio doesn't move much, rate-and-term refinances are underwritten more like a purchase and generally price closer to purchase-loan rates.
Cash-out refinance
Here you're borrowing against equity — the new loan pays off the old one and gives you the rest in cash, commonly used for debt consolidation, home improvement, or other large expenses. Because it increases both the loan balance and the loan-to-value ratio, cash-out refinances carry real trade-offs:
- Higher rates. Cash-out loans typically price a quarter to a half point above a rate-and-term refinance for an otherwise identical borrower, because the lender is taking on more risk relative to the home's value.
- Stricter LTV limits. Conventional cash-out is usually capped around 80% loan-to-value, versus up to 95–97% on some rate-and-term and purchase programs.
- Closing costs on a larger balance. The same 2–5% closing-cost range applies, but calculated against a bigger loan.
- You're converting equity into debt with interest. Using a cash-out refinance to pay off high-interest credit card debt often makes sense on paper, but it turns unsecured debt into a claim on your home — worth thinking through, not just running the math on.
Underwriting differences worth knowing
Cash-out refinances get closer scrutiny on reserves and reasons for the cash — not because lenders will deny you for how you plan to spend it, but because a larger loan against the same collateral means the underwriter is re-verifying capacity and credit as if it were a fresh application, not a formality. Rate-and-term refinances, especially with an existing lender or on a well-documented file, often move faster because less is genuinely changing.
How lenders differ on refinance volume
Some lenders run heavy refinance operations built for fast turn times when rates move; others are purchase-focused and treat refinance as secondary business, which can show up as slower processing or less competitive refinance pricing even from a lender that's excellent on purchase loans. The refinance lenders ranking on this site is built from actual application volume by purpose, so you can see which lenders are genuinely set up for refinance rather than guessing from advertising.