Traditional Mortgage Refinancing vs. Cash-Out Refinancing: Which is Better?

Despite some encouraging signs in the economy, inflation persists. The Federal Reserve is widely expected to raise rates again at its next meeting in late July, possibly by raising mortgage rates again. Earlier this month, according to Freddie MacMortgage rates reached their highest point since November 2022, with an average interest rate of 6.96% on a 30-year fixed-rate mortgage.

These are High mortgage rates Real estate is impacting the market, leaving both buyers and sellers with fewer options. As such, many are considering their refinancing options. With a traditional Mortgage refinancing, you may be able to lock in new terms that make your home more affordable. In contrast, a Cash-out refinancing Can provide you with the cash you need for home improvements or other property purchases.

Understanding how traditional and cash-out refinancing work can help you determine whether a refinance can get you closer to your financial goals. Get a personalized refinance rate here now and learn more.

Traditional mortgage refinancing vs. cash-out refinancing

It’s helpful to first understand how each type works before trying to decide which mortgage refinancing option is best for you.

What is a traditional mortgage refinance?

A conventional mortgage, also known as a rate-and-term refinance, allows you to get a new mortgage, ideally with more favorable terms. The new loan pays off your original loan, so your principal balance remains unchanged. However, you may have one New mortgage rates and tenure of the loan.

For example, let’s say you have a $300,000 variable-rate mortgage with 6.5% interest and monthly payments of $2,025 left. By opting for a rate-and-term refinance with a new 15-year mortgage at a fixed 5% mortgage rate, you can knock 10 years off your loan. You’ll make your loan payments more manageable by avoiding the inevitable rate hikes that come with variable-rate mortgages. And when your new monthly payment is $2,372, you’ll save more than $180,000 in total interest paid over the life of your loan.

Learn more about traditional mortgage refinancing here.

What is a cash-out refinance?

As the name suggests, a cash-out refinance allows you to tap into the equity you’ve built up in your property and access it as cash by taking out a larger mortgage. A cash-out refinance is similar to a traditional one in that it replaces your current mortgage with a new one – and possibly with a new rate and term. However, this type of refinancing is unique because the new loan will be larger than your current loan and you can pocket the cash difference. You can use your cash-out funds to pay off high-interest credit cards, a home renovation project or virtually any other purpose.

Generally, you must have at least 20% equity in your home to qualify for a cash-out refinance, and Mortgage Refinancing Company May allow you to access up to 80% of your home equity.

When a traditional mortgage refinance can be better

A traditional mortgage refinance is an option to consider if you want to lower your monthly mortgage payment by extending the term of your loan, but paying more interest over the life of the loan. Conversely, you can shave years off your mortgage by refinancing from a 30-year mortgage to one. 15 year mortgagePotentially saving thousands of dollars over the life of your loan.

“A traditional refinance makes sense for homeowners when the newly available interest rate is low enough — at least 50 basis points lower — to save over the cost,” said Afifa Saburi, senior researcher at Veterans United Home Loans. “A homeowner should also consider how long they plan to stay in the home and how much money they will save each month.”

Find out what mortgage refinance rates you qualify for right now here.

When a cash-out refinance might be better

Because you’re taking on more debt with a cash-out refinance, many experts recommend refinancing this type of mortgage only for a serious need, such as a large unexpected medical bill or a long-term investment like college tuition. Of course, you’ll want to shop around and compare your other options.

Many homeowners use funds from a cash-out refinance to consolidate high-interest debt or make home improvements. In some cases, you can deduct your refinance interest on your tax return, but only if you use the money to make home improvements that improve the value of your home. Before taking out a cash-out refinance, it’s wise to consult with your tax accountant to see if you qualify for a tax deduction.

It’s also smart to keep an eye on the lender’s charges when considering a cash-out refinance. “Lenders typically view cash-outs as high risk, which results in premium charges,” says Carlton, co-founder and president of New Western. “If cash is not needed, this type of refinancing is not recommended.”

Bottom line

Traditional and cash-out refinancing have unique features that can benefit you in a number of ways, whether you simply want to change the terms of your loan or you want to access your equity to help you achieve important financial goals. Before proceeding, consider the pros and cons of refinancing and other financing options, such as a Home equity loan or home equity line of credit.