Cash-Out vs. Rate-and-Term: Which Refinance Are You Actually Getting?

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Why the experts see a 90% chance of a cut

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom, and today we're talking about refinancing, since interest rates are still continuing to come down — which is fabulous. First we'll talk about why the experts are saying we've got a 90% chance of the Fed cutting interest rates, then we'll jump into refinancing — how it works, and how you get the interest rate you get, because those things are very important.

Next Wednesday is when the Fed makes its announcement. I'll be doing my show live at 1:00 as always — the decision typically comes out around 11:15 to 11:30 Pacific — so I'll be able to tell you what happened, walk through the press conference, and let you know whether it looks like another cut could follow at the next meeting.

So why do the experts think we're going to see the cut? We've talked for years about the Fed's dual mandate — the two big issues that would lean them toward a rate cut. One of them is employment. If employment starts to take a hit, they've vowed to protect it. And this week we got the JOLTS report — basically a jobs report of who's hiring and what openings are available — and it came in lower than expected. Fewer job openings than anticipated. There's mandate number one.

The other side is inflation, and inflation is looking better than it was. They still have concerns things could go the other direction with tariffs, but the last inflation report came in right on target and still under 3%, which means we're moving in the right direction. Things are cooling off, and the Fed can't allow them to cool further than necessary, or it could spiral out of control. These are the things the Fed has said it's weighing, and that's what leads the experts to believe we'll see a rate cut next Wednesday. Fingers crossed.

Breaking the 11-month barrier

What's happening in the meantime? As each report comes out, investors move money around; there's reaction, and there's anticipation — and that's what moves rate sheets. As of last week, we had finally broken through an 11-month barrier in mortgage pricing. You heard me talk about it: we barely broke through the 150 level, very softly. We fell back below it briefly, broke back through yesterday — and today we are up 25 basis points, sitting at 175. We've finally blown past that barrier.

Two things did it today: that JOLTS report, and a Bloomberg article about how mortgages are a great investment right now — especially in more volatile times, mortgages are a stable place to put money. I told you we needed to stay above that 150 for at least a couple of days, and we struggled to do it. But today we're really running. (If you want to know what basis points are, go back and watch last week's episode — I give you the definition.)

This means our interest rates as of today are still moving downward. Now, remember what we said last week: if the Fed cuts next week, that is not necessarily going to move the needle on mortgage rates on the day. It will move rates on home equity lines of credit, credit cards, car loans, student loans — short-term debt. But mortgages are not tied to the Federal Reserve's rate. Sure, it works its way in, but mortgages react to anticipation, reports, and news, just like the stock market. We're already seeing this rate cut built into the rate sheets — we saw it last week, and today put the stamp on it. By next Wednesday, we will have already seen all the improvement we're going to get from this cut. The good news: rates are on their way down.

Cash-out vs. rate-and-term: the rule that changes your rate

With rates coming down, a lot of people are going to be interested in refinancing. So let's talk about who should be looking at one, and why different people get quoted different rates — especially anyone consolidating a first mortgage with a home equity line or home equity loan, which has been the best route for most homeowners to access cash these last three years while keeping a low first-mortgage rate.

First, definitions. When I say a “second,” I mean a home equity line of credit or a second mortgage — both are liens tied to your property in second position on title, so we refer to them as second mortgages.

When we consolidate a first and a second into one loan, that is considered a cash-out refinance — and this is very important — even if you are not getting cash in hand. For most loan programs — conventional and VA, and FHA too if you opened the line or took a draw within the last 12 months — paying off a second counts as cash-out, unless that second was purchase money. If you secured both liens when you bought the house, putting them together is a rate-and-term. But if you took the second out later — pulled cash for debt payoff or home improvements — consolidating it is a cash-out.

Why does it matter? A cash-out refinance gets a higher interest rate than a rate-and-term. If your balance was $700,000 when you bought and it's $695,000 today and we're just refinancing that balance, that's rate-and-term. If we're paying off a second lien you added after purchase — or you simply want $5,000, $10,000, $90,000, $100,000 in hand — that's cash-out, and it prices higher.

What that costs in real numbers

Yesterday I quoted a client — and again, everybody gets a different rate; this was this client's quote: 80% loan-to-value, 720 credit score, their loan amount, conventional. As a cash-out refinance: 7.25%. If it had been a rate-and-term: 6.75%. Half a percent difference in rate for the classification alone. That is a very big difference.

And it moves with the scenario: I have other clients right now quoting conventional rate-and-term refinances at 6.5%, and FHA cash-out refinances at 5.75%. It depends on the loan type, the loan amount, your credit score, your property type — everything. But the cash-out part is a very big deal.

For that same client yesterday, I could do an FHA loan at 5.625% instead of 7.25% conventional — and even with FHA's monthly mortgage insurance, the payment was significantly less for the amount of cash he wanted.

The two-step strategy

Here's the strategy. If we can consolidate — or get the cash out and the debt paid off — while keeping your mortgage payment very close to what you pay today, it's worth doing the refinance now, even at the higher cash-out rate. Because when rates drop further — and this will not be the one and only cut; in 2024 we got three cuts, and this would be 2025's first — your next loan is a rate-and-term refinance. You've already taken the cash-out hit. So as rates keep falling, you get to take advantage of the cheaper classification: refinance again, potentially back to conventional, drop the mortgage insurance, and lower the payment.

Will they cut again at the very next meeting? Maybe not. Could we end up with another one or two cuts this year? We could; we might not. But will we see more rate cuts in 2026? Me personally — Mortgage Mom Radio, my lens, thirty years in this industry — I'd say we will. And as the cuts come, mortgage rates will follow suit.

Or take the FHA route one step further: my client could just stay in that FHA loan and do a streamline refinance in six months — FHA and VA rates run much lower, and depending on where rates go, that could be cheaper than refinancing back to conventional. With every client and every scenario, we're determining the cheapest way to get the money or get the refinance done — the best rate, the lowest payment.

When the answer is: don't

Sometimes the math says no. A client reached out last week — we talk all the time — because she's nervous about her adjustable. She's in a seven-year ARM; somebody else gave her the loan. I flat out told her: “You're only three years into your seven-year adjustable. Your rate and payment today are better than what you could get on a 30-year fixed. Do not do this right now.”

Another client wanted to consolidate after hearing last week's show. Her HELOC balance wasn't much, her first-mortgage balance was much larger, and her first-mortgage rate was so low that her blended rate across the two loans is 3.37%. It does not make sense for her to refinance right now. It just does not.

But for many of you, it does. Many of you have HELOCs of $100,000, $150,000, $200,000 or more. Many of you have rates of 4.5%, 5% — or a 3.75% first with a big HELOC on top. In those situations it may very well be worth putting the two together. There's just no way to know until you reach out and we talk about what you have, what you're looking to do, and what your goal is. Then I'll tell you honestly: yes you should, or no you shouldn't. The numbers do not lie.

Armando popped into the chat asking about his own situation — and when he confirmed his HELOC is at an introductory 3.85% that doesn't end until 2027, my answer was: you are good, man. You've got all of 2026 to ride the rainbow and see where rates end up. You are somebody that does not need to hurry right now. Nicholas chimed in at three and a quarter — and that's a fabulous rate on a first mortgage. If you have a high-rate HELOC with a real balance on top of it, though, that's when we want to talk about the cheapest way to get your money out.

This isn't COVID: cash out means a higher payment

One reminder. During the COVID days, rates just kept going down, and we had clients who refinanced numerous times between 2019 and 2022 — pulling cash out every time while lowering the rate, so the payment stayed the same. If you want cash out of your home, you are increasing your balance — and rates are not dropping through the floor like they did then. Money was very close to free during COVID. That is not the time we're in.

So if you have a first and a second and two payments, the number-one goal is: can we put them together and keep the total payment the same, or close? Then, if you want extra cash out, what's the cheapest way to do it — rewrite the line of credit, or rewrite everything? But don't think your payment stays flat and you get cash in your pocket. That is a very tall task in today's market.

FHA & VA streamline refinances

Now the FHA and VA piece. A lot of my clients purchased homes in 2023, 2024, and this year, when average rates were above 7% — and if you got below 6.75%, you either paid points, the seller paid points, or you did a buydown, which only lasts so long. If you bought between late 2022 and today and you have an FHA or VA loan, we need to be talking right now, because streamline refinances — which are not available on conventional loans — have phenomenal rates.

Here's what a streamline takes: we pull your credit report, get a utility bill proving you still live in the property, and a mortgage statement showing you've paid on time. If you're in a condo, we'll get the HOA statement to confirm that number hasn't changed. That's it — no W-2s, no paystubs, no appraisal. The last time I ran a rate on a streamline refinance, we were in the low fives. So if your rate is 6%, 6.25%, 6.5%, 6.75%, or above 7% on an FHA or VA loan, you should be reaching out right now.

And you can repeat it: FHA allows a streamline every 210 days with six payments made; VA every 240 days after six payments. So roughly every six payments, you can streamline again — just rewriting your mortgage to a lower rate. This is rate-and-term, not cash-out: we're rewriting the terms of what you have today.

Getting on the rate watch

If you bought a house from late 2022 through 2025 — conventional, FHA, or VA — reach out. We'll determine what rate the refinance needs to hit to make sense for you, and then we put you on watch. As soon as I see rates hit your number, I call you and we get things started. There are so many of you who've worked with me before — come back. And if you didn't work with me but you watch the show: I can help you with your purchase, your refinance, your home equity line.

I hope you can feel the sincerity in my heart: your family and your future come first, not my pocketbook. I'm never going to talk you into something that doesn't make sense because it benefits me. I'll show you the numbers, and you drive the decision.

Wrap-up

I'm super excited about next Wednesday at 1:00 — I'll tell you exactly what the Fed said and update you again. This is the third straight show where I've said rates are getting better, which is phenomenal. We've all had bad news for three years; it's about time I'm bringing good news, not just education. Rates coming down makes homes more affordable, there's a bit more inventory sitting out there, sellers aren't selling as fast — so you've got more negotiating power right now.

Don't miss next week: if you don't get my text when I go live, text the word LIVE to 844-935-3634 — that's 844-WE-LEND-4, and it's also the number for my office. Jump on mortgagemomradio.com for the calculators, the contact form, and the podcast if you've missed any shows. Reach out — I want to help you, guide you, and make sure we know exactly what we're waiting for so we can strike at the right time. Have a fabulous rest of your week.