Choosing between a rate and term refinance and a cash out refinance can shape your returns for years. The right pick depends on your strategy, equity position, and what you plan to do with the loan once it closes.

This guide breaks down both options for real estate investors, with a focus on what actually moves the needle on cash flow and portfolio growth.

Key Takeaways

• Rate and term refinance replaces your loan with better terms but no extra cash at closing.
• Cash out refinance pulls equity out of the property as usable funds.
• Rate and term loans typically carry lower interest rates and lower closing costs.
• Cash out is the standard tool for BRRRR investors and portfolio scaling.
• DSCR programs through REIF Loans support both refinance types across 43 states.

What Is a Rate and Term Refinance?

A rate and term refinance replaces your existing mortgage with a new loan that has a different rate, a different term, or both. The loan amount stays close to your current balance, so you do not walk away with cash at closing.

Investors usually pick this option when market rates drop or when they want to move from short term hard money into long term DSCR financing.

What Is a Cash Out Refinance?

A cash out refinance replaces your current loan with a larger one and gives you the difference in cash. That money can fund the next deal, pay for renovations, or build reserves for future acquisitions.

For investment property, lenders cap the new loan at around 70 to 75 percent of the property’s appraised value, depending on the program and borrower profile.

Rate And Term Refinance Vs Cash Out: Key Differences

Both products refinance your existing debt, but they serve very different goals. Investors who understand the trade offs make sharper decisions on every deal in their pipeline.

Here are the core differences at a glance:

• Loan size: Rate and term keeps the balance the same. Cash out increases it.
• Interest rate: Rate and term is usually 0.25 to 0.75 percent lower.
• Max LTV: Up to 80 percent for rate and term, around 75 percent for cash out.
• Closing costs: Lower on rate and term, higher on cash out.
• Best fit: Rate and term suits long term holders. Cash out suits active scalers.

When a Rate and Term Refinance Makes Sense

This option works well when your goal is to lower the monthly payment or shift into a better loan structure. It is also the cleanest path out of expensive short term debt sitting on your books.

Common scenarios where rate and term wins:

• Market rates dropped 0.75 percent or more since you closed.
• You want to move from a hard money loan into a 30 year DSCR product.
• You want a shorter term to build equity faster.
• You need to drop mortgage insurance after gaining enough equity.

When a Cash Out Refinance Makes Sense

Cash out is built for investors who need capital to keep moving. If your equity is sitting idle in one property, a cash out refinance turns it into buying power without forcing you to sell.

Use cash out when one of these fits your plan:

• You are running the BRRRR strategy and need to recycle capital into the next deal.
• You finished a value add project and want to pull the new equity created.
• You see a stronger return opportunity in another market or asset class.
• You want to consolidate higher cost debt sitting across your portfolio.

Costs, Rates, and LTV Limits to Watch

Cash out refinances cost more because lenders take on extra risk when the loan balance grows. Expect a slightly higher rate, more points at closing, and stricter reserve requirements compared to a rate and term loan.

Rate and term refinances are friendlier on closing costs, but they only help if your existing loan has terms worth replacing. If you locked in a low rate years ago, refinancing may not pencil out at all.

Common Mistakes Investors Make

Refinance decisions look simple on the surface but quietly hurt long term returns when rushed. A few of the same mistakes show up again and again across investor portfolios.

Watch out for these traps:

• Pulling cash out without a clear deployment plan for the funds.
• Ignoring prepayment penalties on the existing loan.
• Forgetting how the new payment will affect your DSCR ratio.
• Refinancing too soon after purchase and missing seasoning rules.
• Skipping a break even analysis on closing costs versus monthly savings.

How REIF Loans Helps You Choose the Right Refinance

REIF Loans works only with real estate investors, so every refinance gets reviewed through a portfolio lens, not a homeowner one. The team looks at your cash flow targets, future acquisitions, and exit plan before recommending a path.

Founded by Elizabeth Shvartsman, REIF Loans offers DSCR refinance, cash out refinance for investors, and non QM products across Michigan and 43 other states. Pre qualification is fast, the process is transparent, and the advice is built around scaling your portfolio.

The Bottom Line

Rate and term refinance saves money on the loan you already have. Cash out refinance gives you capital to grow what you own. Neither choice is universally better.

The right answer depends on whether you are protecting cash flow on a long term hold or pulling equity to fund the next acquisition. If you want a second set of eyes on the numbers, REIF Loans can run both scenarios side by side and show which option fits your strategy.

FAQs

Is a cash out refinance worth it on an investment property?

Yes, when you have a clear use for the funds and the new payment still supports a healthy DSCR ratio on the property.

What is the maximum LTV on a cash out refinance for investors?

Most programs cap cash out at 70 to 75 percent LTV on investment property, though limits vary by lender, property type, and credit profile.

Can I do a rate and term refinance on a DSCR loan?

Yes. DSCR loans qualify for both rate and term and cash out refinances, and REIF Loans offers both options for investors.

How long do I have to wait to refinance after buying?

Seasoning rules vary, but most cash out programs require six months of ownership before you can refinance based on the new appraised value.