Refinancing Tips · January 20, 2025
How Refinancing Works: Rate & Term vs. Cash-Out
There are two main types of mortgage refinance — and they serve completely different purposes. Here's how each works and when to use them.
Refinancing replaces your current mortgage with a new one. But not all refinances are created equal.
Rate & Term Refinance
Changes your interest rate, loan term, or both — without pulling cash out. Common reasons: lower your rate to reduce monthly payment; shorten your term (30-year to 15-year) to pay off faster; switch from ARM to fixed; remove FHA MIP by refinancing to conventional.
Example: Refinancing $280,000 from 7.5% to 6.5% on 30 years saves ~$177/month — $63,720 over the life of the loan.
Cash-Out Refinance
Replaces your current mortgage with a larger one — you receive the difference in cash. Common uses: home renovations, debt consolidation, college tuition, investment property down payments.
Example: You owe $200,000 on a home worth $350,000. A cash-out refi to $275,000 gives you $75,000 cash while keeping LTV at 78%.
The Break-Even Analysis
Always calculate: Total Closing Costs ÷ Monthly Savings = Break-Even Months
If $5,000 in costs and $200/month savings: break-even is 25 months. Stay longer than that and refinancing makes financial sense.
HMS runs this analysis for every borrower before you commit. Call 309-222-8286 for your free refinance evaluation.