Positive Real Estate Professionals

Yesterday I was talking to a home owner that was toying with refinancing his property and had some questions that he needed answers. It surprised me that he wanted to know the difference between Rate and Term Refinance versus Cash Out Refinance. The reason that this surprised me so much is that most people do not know this terminology unless they are in the business or currently in the process of doing a loan. In the case of this borrower, his was the latter.

So, basically, I broke Rate and Term down for the home owner in this simple statement; Rate and Term Refinance is typically accomplished when all that you are paying off is the existing loans that were used to purchase the home. In some cases lenders will also consider a Rate and Term Refinance when the second loan that is being paid off was acquired after the purchase and the money was used to improve the property. The latter clause is not a rule of thumb, so please check with your lender. Also, some lenders will allow up to $2000 in cash out or to pay off bills in this type of refinance. As for cash out, I am going to defer to PREP’s residential mortgage guru, Fred Chamberlin for his complete explanation of this product.

Now that you have the picture of both products, let me add this in for you. Typically, most lenders will offer a lower interest rate on a Rate and Term product. The difference will not be huge, but it could be an extra $25 to $50 in your packet each and every month, and that is huge in itself.