Two versions of a refinance exist, and they solve different problems. Cash-out gets you capital. Rate-and-term lowers your payment or swaps a short-term loan for a long one. Picking the right one depends on three simple questions.
The Three Questions
- Do you need cash right now for another deal or expense?
- Are current rates meaningfully lower than your existing rate?
- Is your existing loan expiring or about to?
Yes to #1 → cash-out. Yes to #2 with no to #1 → rate-and-term. Yes to #3 → rate-and-term (or cash-out if equity is there and deployable).
Rate-and-Term Refi: The Basics
A rate-and-term refi pays off your existing loan at its current balance. You do not walk away with cash. The benefits are in payment reduction, term adjustment, or escaping a balloon.
When it works best:
- Rates have dropped 0.75% or more from your current rate
- Your bridge loan is maturing and the property is stabilized
- You want to switch from IO to amortizing (or vice versa)
- You want longer amortization to boost cash flow
Typical pricing:
Rate-and-term loans get the best DSCR pricing available — no cash-out surcharge. On Pimlico's rate sheet, that can be 25–50 bps better than cash-out. Closing costs typically run 2–3% of loan amount.
Cash-Out Refi: The Basics
A cash-out refi gives you a larger new loan than your existing balance. You pocket the difference (minus closing costs) as tax-free cash.
When it works best:
- You have a deal to deploy capital into
- You want to recycle equity out of a stabilized property
- Property has appreciated materially since purchase
- You want to fund a rehab on another property
Typical pricing:
Cash-out DSCR loans price 25–50 bps higher than rate-and-term. Max LTV is typically 75% vs. 80% on rate-and-term. Seasoning of 3–6 months on ownership often required.
Side-by-Side Example
Property worth $400K, existing loan balance $220K at 8.5%.
| Scenario | Rate-and-Term | Cash-Out |
|---|---|---|
| New loan | $220,000 | $300,000 (75% LTV) |
| Rate | 7.25% | 7.75% |
| Monthly P&I | $1,501 | $2,148 |
| Cash to borrower | $0 | ~$72,000 (after $8K closing) |
| Monthly payment change | −$191 | +$456 |
Which is better? Depends. If you have a deal returning 20%+ on that $72K, cash-out wins despite the higher monthly payment. If you do not, rate-and-term is the safer play.
Combined Play
If rates drop meaningfully AND you have a deal to deploy into, cash-out captures both benefits. Lower rate on the refinanced portion plus deployable capital. This is the best-of-both-worlds scenario.
Things That Affect Both
- Seasoning. 3–6 months ownership typical before cash-out eligibility.
- Prepayment penalty. Current loan's prepay penalty can offset the savings.
- DSCR at new loan size. Cash-out loans require DSCR to still qualify at the higher debt service.
- Appraisal. Both require an appraisal; cash-out is more sensitive to appraisal value.
Making the Decision
Ask yourself: what problem am I solving? Lower payment → rate-and-term. Need capital → cash-out. Replacing a maturing bridge → either, depending on capital needs. Do not overthink it.
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