What is the difference between a rate-term refinance and a cash-out refinance?

• A. Rate-term replaces existing loan terms; cash-out increases the loan amount to take out equity
• B. Cash-out increases the loan amount to take out equity; rate-term increases the loan amount
• C. Rate-term changes only the interest rate; cash-out does not affect loan terms
• D. Cash-out reduces the loan balance and rate-term reduces the interest rate

Answer: (A)

This question tests the difference between changing the loan’s terms and taking cash out when you refinance. In a rate-term refinance, you pay off the existing loan with a new one that has a different interest rate and/or a different term, with the goal of changing payments or total interest, but you’re not taking extra cash from the home’s equity. The loan amount typically covers the payoff of the old loan plus any allowed closing costs funded into the new loan, not cash taken out of equity.

In a cash-out refinance, you refinance for a higher loan amount than you owe and receive the difference in cash. This increases the loan balance and lets you access home equity.

So the statement that rate-term replaces the existing loan terms and cash-out increases the loan amount to take out equity captures the distinction.