When homeowners think about refinancing, they're usually considering one of two options: rate-and-term or cash-out. Both replace your existing mortgage with a new one, but they serve very different purposes.
Rate-and-Term Refinance
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).
When to Use It
- Lower your interest rate: The classic reason to refinance — your current rate is higher than what's available today
- Shorten your term: Move from a 30-year to a 15-year mortgage to pay off your home faster and save on total interest
- Switch from ARM to fixed: Lock in a predictable 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
- Lower interest rates compared to cash-out (typically 0.125-0.25% less)
- Lower closing costs in some cases
- Pure financial optimization — you're simply improving your loan terms
- No DC recordation tax — residential refinances are fully exempt with a one-page affidavit filed at closing (D.C. Code § 42-1102(21))
Example
Current: $500,000 loan at 7.0%, 30-year fixed, 28 years remaining New: $500,000 loan at 6.25%, 30-year fixed
- Monthly savings: $248
- Annual savings: $2,976
- Closing costs: ~$12,000
- Break-even: ~48 months
Cash-Out Refinance
A cash-out refinance replaces your current mortgage with a larger one, and you receive the difference as cash.
When to Use It
- Home improvements: Fund renovations that increase your property value
- Debt consolidation: Replace high-interest debt with your lower mortgage rate
- Major expenses: Education, medical bills, or other significant costs
- Investment: Use equity to fund an investment property down payment
Advantages
- Access to large sums — DC's high property values mean substantial equity potential
- Lower rates than alternatives — mortgage rates are typically lower than personal loans, credit cards, or HELOCs
- Tax benefits — interest may be deductible if funds are used for home improvements
- Single payment — consolidate multiple debts into one mortgage payment
Example
Current: $400,000 remaining on a home worth $700,000 New: $560,000 loan at 6.50% (80% LTV) Cash received: ~$160,000 (minus closing costs)
Head-to-Head Comparison
| 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 | Optimize terms | Access equity |
Key Decision Factors
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 best possible interest rate
- You're planning to stay in your home and want optimal loan terms
Choose Cash-Out If:
- You have a specific, financially sound use for the funds
- You have sufficient equity (most lenders require you to retain 20%)
- The alternative sources of funds (credit cards, personal loans) are more expensive
- You're comfortable with a potentially higher monthly payment
Consider Both If:
- Current rates are lower than your existing rate AND you need funds — a cash-out refinance might still save you money monthly while giving you access to cash, depending on the numbers
DC-Specific Factors
Recordation Tax: $0 Either Way
Here's a pleasant surprise that levels the playing field: 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, that's $0 in recordation tax with the affidavit — not the $6,160 you'd owe if the full amount were taxed. (Without the affidavit, the fallback rule would tax only the amount above your old balance.) Recordation tax shouldn't tip your rate-and-term vs cash-out decision either way.
High-Value Market
DC's high property values work in favor of both options:
- Rate-and-term: Higher loan amounts mean larger dollar savings from the same rate reduction
- Cash-out: More equity available to access
Making Your Decision
Run the numbers for both scenarios. 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
The right choice depends entirely on your financial goals, timeline, and how you plan to use any cash received.
Ready to run your numbers? See our DC cash-out refinance guide or get pre-qualified — two minutes, no credit pull.
