Rate and Term Refinance vs Cash-Out: Two Ways to Finish a BRRRR

A rate and term refinance replaces the loan you have with a new loan at a new rate and a new term. It pays off the old balance, rolls in the closing costs, and hands you almost nothing. A cash-out refinance borrows more than you owe and wires you the difference. Fannie Mae calls the first one a limited cash-out refinance, which is why a search for a rate and term refinance on a rental often turns up that phrase instead.

Both can finish a BRRRR. On a thin deal, the rate and term version is sometimes the one that closes. The guide on what lenders want for a BRRRR cash-out refinance covers caps, seasoning and DSCR in detail. This page is about picking between the two.

The numbers here use the site’s example deal: buy for $300,000, spend $60,000 on rehab, finish at a $500,000 after repair value, rent for $4,400 a month, with $850 a month of holding costs, $6,000 of taxes and $2,500 of insurance. The simple version is $360,000 in, a refinance at 75% of $500,000 for a $375,000 loan, every dollar back plus $15,000.

What each refinance actually does

Both loans pay off every lien on the property. The difference is what happens after the payoff.

A rate and term refinance is sized by your debt. The new loan covers the old balance plus closing costs and prepaid items, and the rules allow only a token amount of cash back. Under Fannie Mae’s limited cash-out guidelines that is the lesser of 2% of the new loan or $2,000.

A cash-out refinance is sized by the property. The lender lends a percentage of the appraised value, pays off the liens, and the rest is yours.

Rate and term: paying off the rehab loan only

Say hard money covered 90% of the purchase, a $270,000 loan, and you paid the $60,000 rehab from savings. At refinance time you owe $270,000. Add about $11,250 of refinance closing costs, 3% of the new loan on this deal, and the rate and term loan comes to roughly $281,250. That is 56% of the $500,000 appraisal, well under any cap.

You get no check. The $30,000 down payment, the $60,000 of rehab, the points and the interest all stay in the property as equity.

Change one thing and the answer changes. If the hard money lender funded the purchase at 90% and the full rehab, the balance at refinance is $330,000, and the rate and term loan pays all of it off. Only your $30,000 down payment and your soft costs are left in. A rate and term refinance returns borrowed money, not your money. How much of your cash comes home depends on how much of the project you borrowed and recorded as a lien.

Cash out: pulling your own money back

Same deal, cash-out at 75% loan to value, so a $375,000 loan. Pay off $270,000, pay $11,250 of costs, and $93,750 comes back. That covers the $30,000 down and the $60,000 rehab with $3,750 left toward points, interest and holding.

That is the whole appeal. A cash-out does not care how you funded the rehab. It lends against value, so it can return money that was never borrowed. The guide on what you actually walk away with works through the deductions between the loan amount and the wire.

Rate, LTV cap and seasoning differences

Price. Cash-out carries extra pricing adjustments on conventional loans, and DSCR lenders price it up as well. The gap usually runs from a fraction of a point to about three quarters of a point, depending on credit, LTV and the lender. Ask one lender for both quotes on the same day. That is the only comparison that means anything.

Cap. On an investment single family, cash-out commonly tops out at 75% of value, and lower on two to four units or with weaker credit. The limited cash-out cap at the same lender is usually equal or higher, which only matters when your payoff is large relative to value.

Seasoning. Conventional cash-out on an investment property generally requires six months of ownership before the appraised value can be used. A limited cash-out is not held to that ownership rule, so a finished and leased property can sometimes refinance sooner. Loans sold to Fannie Mae follow the published guidelines, but lenders add their own overlays, so get both timelines in writing before you buy.

Payment. The smaller loan is easier to qualify. $375,000 at 7.25% is about $2,558 a month, and with $708 of taxes and insurance the full payment is $3,266, a 1.35 ratio against $4,400 of rent. The $281,250 rate and term loan at 6.75% is about $1,825, or $2,533 with taxes and insurance, a ratio of 1.74. On a property where rent is tighter, that difference decides approval. How lenders size your new loan covers the ratio math.

Which one leaves you able to buy again

Cash-out, almost always. Equity you cannot spend does not buy the next house, and the no cash left in the deal version of BRRRR only works when the refinance returns your money.

The exception is the deal that will not support a full cash-out. Suppose the appraisal lands at $450,000 instead of $500,000. A 75% cash-out is $337,500, which returns $56,250 after the payoff and costs and leaves about $33,750 of your $90,000 in the deal. A rate and term loan of $281,250 is 62.5% of that appraisal, closes at a better rate, and carries a payment the rent covers easily. You keep the property and your borrowing capacity, then come back for the cash-out later when values, rent or seasoning support it.

Refinancing twice costs you twice. Budget another 2 to 3% of the new loan for the second set of closing costs, and check whether the first loan has a prepayment penalty, because many DSCR loans do.

Running the deal both ways

Ask each lender for four numbers: the rate on a rate and term, the rate on a cash-out, the cap on each, and the seasoning on each. Then run the deal twice in the BRRRR calculator on the home page, once at the cash-out loan amount and once at your expected payoff. The first tells you how much cash comes back. The second tells you whether the deal still stands if it does not.