When an investor refinances a rental property with a DSCR loan, the very first decision is which type of refinance it is. Cash-out or rate-and-term. The two are underwritten differently, priced differently, and capped differently. Choosing the wrong one, or not realizing they are different, can cost you loan-to-value, rate, or both. Here is the head-to-head.
The Core Difference in One Sentence
A rate-and-term refinance replaces your existing loan with a new one and does not put cash in your pocket. A cash-out refinance replaces your existing loan with a larger one and hands you the difference. That single distinction drives everything else.
Rate-and-Term Refinance: The Conservative Move
A rate-and-term refinance is about improving the loan itself. You might be lowering your rate, moving off an adjustable rate onto a fixed rate, exiting a hard-money or bridge loan, or changing the term. The new loan amount covers your existing payoff plus closing costs, and that is all.
Because no equity leaves the property, lenders view rate-and-term as lower risk. That shows up as higher loan-to-value caps, sharper pricing, and somewhat easier underwriting. If all you need is a better loan, rate-and-term is the cheaper, cleaner path.
Cash-Out Refinance: The Capital Move
A cash-out refinance is about pulling equity out of the property to use elsewhere. Investors use cash-out to fund the down payment on the next acquisition, to renovate another property, to consolidate more expensive debt, or to build a reserve cushion. The new loan pays off the old one and delivers the rest to you as cash.
Because equity is leaving the property, lenders treat cash-out as higher risk. That shows up as lower loan-to-value caps, a rate that runs somewhat higher than rate-and-term, and closer scrutiny of the appraisal and the file.
Side by Side
- Proceeds to you: rate-and-term puts no cash in hand. Cash-out delivers the equity difference.
- Loan-to-value: rate-and-term generally allows a higher cap. Cash-out is capped lower.
- Rate: rate-and-term usually prices better. Cash-out carries a modest premium.
- Underwriting: rate-and-term is lighter. Cash-out gets more scrutiny on value and reserves.
- Best use: rate-and-term improves the loan. Cash-out frees capital to deploy.
How to Choose
Ask yourself one question. Do I need cash out of this property, or do I just need a better loan on it? If you have a clear, productive use for the equity, especially another deal that will earn more than the cost of the cash-out, then cash-out is worth the slightly higher rate and lower loan-to-value. If you simply want to improve the rate, term, or structure of the existing loan, rate-and-term gives you that at a better price.
A common mistake is taking cash out just because it is available. Equity pulled out of a property and left sitting in a checking account is costing you the cash-out rate premium for nothing. Cash-out makes sense when the money has a job to do.
A Note on Seasoning
Seasoning rules tend to bite harder on cash-out than on rate-and-term. Many lenders allow rate-and-term refinances almost immediately, while cash-out can carry a six-month seasoning requirement, though some programs allow day-one cash-out at a slightly lower loan-to-value. If timing matters to your plan, factor this in early.
Pick the Right Refinance With Select Home Loans
The right choice between cash-out and rate-and-term depends on your numbers and your plan for the property. Select Home Loans can run both scenarios side by side so you can see the real difference in proceeds, rate, and loan-to-value before you commit. Contact Nick at Select Home Loans, NMLS #2384002. Call (888) 550-3296 or visit https://www.selecthomeloans.com/dscr-loans/ to compare your options.
Disclaimer
Disclaimer: This article is for general educational purposes and does not constitute lending, legal, tax, or financial advice. Loan programs, guidelines, rates, and property eligibility rules change frequently and vary by lender and by individual borrower scenario. Confirm all current terms directly with a licensed mortgage professional before making a decision. Select Home Loans is a non-QM mortgage broker. NMLS #2384002.
