Rate-and-Term vs Cash-Out vs Streamline Refinance: Which One Fits?

There are four main ways to refinance a mortgage in the US. A rate-and-term refinance changes your interest rate, your loan term or both, without taking cash out. A cash-out refinance replaces your loan with a bigger one and pays you the difference. An FHA streamline and a VA Interest Rate Reduction Refinance Loan (IRRRL) are simplified refinances for people who already have an FHA or VA loan. Which one fits depends on the loan you have now and what you are trying to achieve.

Rate-and-term refinance

A rate-and-term refinance pays off your current mortgage with a new one for roughly the same balance, plus closing costs if you roll them in. You change the rate, the term, the loan type (for example, adjustable to fixed) or a combination.

Good for:

• Lowering your rate when market rates have fallen or your credit has improved.
• Shortening your term, such as moving from 30 years to 15 or 20.
• Moving from an adjustable-rate mortgage to a fixed rate.
• Moving from an FHA loan to a conventional loan to remove mortgage insurance, if you have enough equity.

What to expect: full underwriting with income, asset and credit checks, and usually an appraisal, though some lenders can use automated valuations. You pay normal closing costs. Use our break-even guide to check that the savings beat those costs in time.

Cash-out refinance

A cash-out refinance replaces your current loan with a larger one. The new loan pays off the old one, and you receive the difference at closing. People use it for home improvements, paying off higher-interest debt or large expenses.

Key points:

• Your whole balance gets the new rate. Not just the cash portion. If your current rate is low and today's rates are higher, a cash-out refinance can raise the cost of your entire mortgage.
• Loan-to-value limits apply. Lenders cap how much of your home's value you can borrow against, and those limits differ by loan program and lender. Check each lender's current limits.
• Rates are often a little higher than for a rate-and-term refinance with the same borrower, because cash-out loans are priced as somewhat riskier.
• Your home secures more debt. Turning unsecured debt like credit cards into mortgage debt can lower the rate, but missing payments now puts your home at risk.

FHA and VA both have their own cash-out refinance programs. A VA cash-out refinance can also be used by eligible borrowers to move a non-VA loan into a VA loan.

FHA streamline refinance

An FHA streamline refinance is for borrowers who already have an FHA-insured loan. It is designed to make refinancing quicker and cheaper.

Typical features:

• Often no appraisal required.
• Reduced documentation, and in some cases limited income verification. Lenders may still run a credit check and add their own requirements.
• You must be current on your payments and the refinance must provide a net tangible benefit, such as a lower combined rate and mortgage insurance payment.
• No cash out beyond small adjustments.
• FHA mortgage insurance still applies, though the FHA may credit part of your original upfront premium.

If your home has gained a lot of value, compare the streamline with a refinance into a conventional loan, which may let you drop mortgage insurance altogether.

VA IRRRL (VA streamline refinance)

The VA Interest Rate Reduction Refinance Loan is for borrowers who already have a VA-backed loan. It replaces that loan with a new VA loan, usually at a lower rate or to move from an adjustable to a fixed rate.

Typical features:

• Often no appraisal and less paperwork than a full refinance.
• You do not need to live in the home now, but you must certify that you lived there in the past.
• Closing costs can usually be rolled into the new loan.
• A VA funding fee applies unless you are exempt, for example if you receive VA compensation for a service-connected disability.
• Lenders must show the refinance gives you a benefit, and there are seasoning rules about how soon you can refinance.

Lenders such as Veterans United, Rocket Mortgage and New American Funding list the VA IRRRL on their sites. Compare quotes from more than one, because lender fees and rates still differ.

Side-by-side summary

When a HELOC or home equity loan is the better choice

If you want cash but your current mortgage rate is lower than what you would get today, think twice about a cash-out refinance. A home equity loan gives you a lump sum as a second mortgage, usually at a fixed rate. A home equity line of credit (HELOC) lets you draw as needed, usually at a variable rate. Both leave your first mortgage and its rate in place.

Some lenders market home equity lines as a faster alternative to a cash-out refinance. Figure, for example, offers a home equity line on its cash-out refinance page that can pay off a junior lien and consolidate debts while you keep your first mortgage. That is a different product from a traditional cash-out refinance, so compare the APR, fees, whether the rate is fixed or variable, and the total cost over the time you expect to carry the balance.

How to choose

1. Check your current loan type and rate. If you have an FHA or VA loan, get a streamline quote first.
2. Decide whether you need cash. If not, a rate-and-term or streamline refinance keeps your balance steady.
3. If you need cash, compare three paths: cash-out refinance, home equity loan and HELOC. Look at the total cost, not only the monthly payment.
4. Get Loan Estimates from several lenders for the same option on the same day. Our guide to comparing Loan Estimates shows what to compare.

Rates, fees and program rules are set by lenders and by the FHA and VA, and they change. Confirm current eligibility and costs with each lender before you apply. Getting a quote may use a soft credit inquiry, while a full application typically uses a hard inquiry.