A refinance is either rate-and-term or cash-out. Both replace your existing mortgage with a new loan. A cash-out refinance also raises the loan balance and pays you the added amount, minus closing costs, in cash.
How a rate-and-term refinance works
A rate-and-term refinance changes your interest rate, your loan term, or both, without increasing your loan balance (beyond closing costs that may be rolled in).
Reasons to do a rate-and-term refinance
- Lower your interest rate: Your current rate is above what is available today
- Shorten your term: Move from a 30-year to a 15-year mortgage to pay off your home sooner and pay less total interest
- Switch from ARM to fixed: Move to a fixed payment before your adjustable rate resets
- Remove FHA mortgage insurance: Refinance from an FHA loan to a conventional loan once you have 20% equity
Advantages of a rate-and-term refinance
- Lower pricing than cash-out: Fannie Mae and Freddie Mac add loan-level pricing adjustments to cash-out loans, so for the same borrower and LTV a rate-and-term refinance prices lower
- Lower closing costs in some cases
- No DC recordation tax: residential refinances are fully exempt with a one-page affidavit filed at closing (D.C. Code § 42-1102(21))
Rate-and-term example
Current: $500,000 balance, 30-year fixed, 28 years remaining New: $500,000 loan, 30-year fixed, at a lower rate
Closing costs on a DC refinance run $3,000–$8,000, with no recordation tax. Divide the closing costs by your monthly saving to get the break-even in months; if you will keep the loan past the break-even month, the refinance costs less than it saves. Run your own figures on our savings calculator.
How a cash-out refinance works
A cash-out refinance replaces your current mortgage with a larger one. You receive the new loan amount minus your old balance and closing costs in cash.
Reasons to do a cash-out refinance
- Home improvements: Fund renovations that increase your property value
- Debt consolidation: Pay off credit cards and other higher-rate debt
- Major expenses: Education, medical bills, or other significant costs
- Investment: Use equity to fund an investment property down payment
Advantages of a cash-out refinance
- Large lump sum: you can borrow up to 80% of the home's value on a conventional loan, minus what you owe
- First-mortgage pricing: a first mortgage is secured by the home, so it prices below personal loans, credit cards and HELOCs
- Possible tax deduction: interest may be deductible if the funds are used for home improvements
- One payment: multiple debts become one mortgage payment
Cash-out example
Current: $400,000 remaining on a home worth $700,000 New: $560,000 loan (80% LTV) Cash received: ~$160,000 (minus closing costs)
Rate-and-term and cash-out side by side
| Factor | Rate-and-Term | Cash-Out |
|---|---|---|
| Interest rate | Lower | Slightly higher |
| Loan amount | Same or lower | Higher |
| Closing costs | Standard | Standard (on larger amount) |
| Monthly payment | Lower | May increase |
| DC recordation tax | $0 (with affidavit) | $0 (with affidavit) |
| Equity position | Unchanged | Reduced |
| Purpose | Change rate or term | Take cash from equity |
Which refinance to choose
Choose rate-and-term if
- Your primary goal is lowering your monthly payment or total interest
- You don't need cash and want to maintain your equity position
- You want the lowest rate available to you
- You plan to stay in your home past the break-even month
Choose cash-out if
- You have a specific use for the funds, such as a renovation or paying off higher-rate debt
- You have sufficient equity (agency guidelines cap a cash-out on a primary residence at 80% of value)
- The alternative sources of funds (credit cards, personal loans) are more expensive
- You're comfortable with a potentially higher monthly payment
Price both if
- Current rates are below your existing rate and you need funds. Depending on your balance and rate, a cash-out refinance can lower the monthly payment and pay out cash at the same time.
DC factors for both refinance types
DC recordation tax is $0 on both
DC fully exempts residential refinance deeds of trust from recordation tax, including the entire loan on a cash-out, for homes with 5 or fewer units. The exemption is claimed with a one-page notarized Security Affidavit your settlement agent records with the deed of trust (D.C. Code § 42-1102(21)).
On a $560,000 cash-out refinance the recordation tax is $0 with the affidavit; taxed at 1.45%, the full amount would owe $8,120. Recordation tax does not differ between the two options.
Loan size
The size of your loan affects both options:
- Rate-and-term: the same rate reduction lowers the payment by more dollars on a larger balance
- Cash-out: a higher-value home has more equity available at 80% LTV
How to compare the two
Price both options and calculate:
- Your monthly payment under each option
- Total closing costs (recordation tax should be $0 on a residential DC refi)
- Break-even timeline
- How the cash-out funds will be used and their expected return
Read the DC cash-out refinance guide or get pre-qualified. Pre-qualification takes two minutes and does not pull your credit.
