Rate-and-Term Refinance
Refinancing to change a loan's interest rate or term without taking significant cash out. Investors use it to lower payments or, critically, to pay off short-term hard money with permanent financing.
A rate-and-term refinance replaces an existing loan with a new one solely to change its interest rate, its term, or its loan type — without pulling out meaningful cash. Any cash to the borrower is limited (often capped at a token amount like $2,000–$5,000); beyond that it becomes a cash-out refinance.
The two refinance flavors
- Rate-and-term: new loan ≈ old payoff. Goal is better terms.
- Cash-out: new loan > old payoff. Goal is to extract equity.
Because no equity leaves the property, rate-and-term is less risky to the lender and usually qualifies for a higher LTV and a slightly better rate than cash-out.
Why investors use it
The most important investor use is the bridge-to-permanent takeout:
- You buy and rehab with a short-term hard money or bridge loan.
- Once the property is stabilized and rented, you do a rate-and-term refinance into a 30-year DSCR loan.
- The new loan pays off the hard money at a far lower long-term rate — you're not taking cash, just swapping expensive short-term debt for cheap permanent debt.
Other uses: dropping from a high pandemic-era rate when rates fall, converting an interest-only or balloon structure into amortizing financing, or escaping an adjustable-rate loan.
A worked example
| Before | After | |
|---|---|---|
| Loan type | 12-mo bridge | 30-yr DSCR |
| Balance | $225,000 | $225,000 |
| Rate | 11% (interest-only) | 7.25% (amortizing) |
| Payoff balloon | Due at month 12 | None |
The rate-and-term refinance retires the balloon and locks in a sustainable long-term payment — no cash changes hands, but the financing is transformed.
What to watch
Even without cash out, you still pay closing costs and possibly points, so the rate improvement has to justify them. And the new loan resets your amortization clock. On a takeout refinance, confirm the DSCR and any seasoning requirement clear before your bridge loan's balloon comes due — the whole point is a clean, on-time exit.
Frequently asked questions
What's the difference between rate-and-term and cash-out refinance?
A rate-and-term refinance changes your rate or term without taking meaningful cash out — the new loan roughly equals your existing payoff. A cash-out refinance deliberately borrows more than you owe to extract equity. Rate-and-term usually allows higher LTV and a slightly better rate because no equity leaves the deal.
Can I use a rate-and-term refinance to pay off a hard money loan?
Yes, and it's one of the most common investor uses. After buying and rehabbing with short-term hard money, you refinance into a 30-year DSCR loan at a much lower rate. The new loan pays off the hard money — you're swapping expensive short-term debt for cheap permanent debt without taking cash.
How much cash can I take in a rate-and-term refinance?
Very little — typically a small cap (often a few thousand dollars) to cover incidental costs. Beyond that threshold, the loan is reclassified as cash-out, which carries a lower LTV ceiling and usually a higher rate. If your goal is to extract equity, you want a cash-out refinance instead.