Cash-out refi or normal rate & term refi in my situation?

Question

House details: I own a 5 bed 2 bath house that I'm currently house hacking but moving out once I find my next property to owner occupy. I bought it for $284k, current market value is $380k (very low end/conservative), $425k high end/target number. Plan is to keep it as a rental when I move out since it's in a great area and 5 beds is unique for this neighborhood let alone this market on a SFH (original owner had an addition built). Rental comps are a little tricky here because there isn't many 5 bed homes available for rent in this area (not sure if that's necessarily working for or against me?). However 4 beds are renting for ~$2800 / mo with decent renovations. Mine is practically fully renovated (did it myself over time while living here) as in fully tiled bathrooms, huge master bedroom/bath, refinished original hardwood floors, kitchen cabinets with plenty of granite countertop space, stainless steel appliances, etc. I'm thinking low-end $3k / mo rent and high end $3200-3400 but as mentioned before, i'm not sure how much in-demand 5 bedroom rentals are. With limited options on the market (could be a good or bad thing?), a family that truly needs a 5 bedroom rental would definitely pay $3k+. Or at least a family that needs 4 beds and use the 5th one as a home office.

My current rate on the house is 7.35% from when I bought roughly 2 years ago. My monthly P&I + escrow (insurance / taxes) is $2,273 / month. I'm debating whether cash-out refinancing or a normal rate & term refinance, assuming I'm keeping/holding this property as a rental. It doesn't make too much sense to just sell the house because after $40k in reno costs, after realtor fees and everything I wouldn't be pocketing much. Appreciation on this house in this area will play a huge role long term.

I used a HELOC on my previous house to close on this one. I have a $60k revolving line of credit where I used $35k of it to not only pay down payment & closing costs, but some reno costs as well when I needed to. So I have a $310 monthly payment for the HELOC. My initial goal was to cash-out refi this house so I can pay off the HELOC and essentially get this house for "free" (not actually free but no money left my bank account when I closed on this place, I've just been paying $310 / month towards HELOC that allowed me to own this property). I can achieve this goal by doing a cash-out refi and ballooning my HELOC balance but my new rate would be 6.625%, a decent improvement from 7.35%. On the flip side, I can do a rate & term refi and get my rate down to 5.99% which is a great improvement but I don't get cash in my pocket to pay off the HELOC balance.

Here are the numbers from my lender:

Rate & Term Refinance Rate = 5.99% w/ No Loan Fees (Points)

70% Loan To Value on 380,000 Value

Projected Monthly Payment = $1573 + $410 (escrow) = $1983

Cash Out Refinance Rate = 6.625% w/ no Loan Fees (Points)

80% Loan to Value on 380,000 Value

Projected Monthly Payment = $1921 + $410 (escrow) = $2331

Cash Out Amount = 30,000-ish

After thinking about this more, I'm now leaning towards just a normal rate & term refinance. However, I could cash-out refi now, pay off my HELOC balance completely to eliminate that $310 / month payment, and then after 6 months look to potentially do a rate & term refi and hopefully rates are still lower than my would be current 6.625% but of course would be paying closing costs twice. The $310 monthly HELOC payment isn't killing me, it's just on auto-pay but it would be nice to eliminate it.

I know this is long to read and appreciate anyone that does so but feel like I needed to explain whole scenario to best get a grasp on what route I should take. Thanks in advance!

Account Closed · Answer

Well, I think you should ask yourself, how long are you good with sitting on the sidelines? Its a personal question. If you LOVE rehabbing that has value. I place a high value on doing what I love and one of my goals is to be able to afford to do so. Doing the work to physically increase property value yourself, most markets still have deals out there right now. So maybe you cash out, pay off that heloc and prepare for the next deal. Or, maybe youre prefectly content knowing you did a great job executing on this deal....maybe you do the rate and term, enjoy your summer, invest outside of real estate, wait a little longer, etc.

Is the room hacking, while you're still living in it, currently paying all of your bills? Or how close?

What do you think that market is going to do in the near future? What about interest rates for the next year? Things I would consider and speculate on.

Regardless, it sounds like youre doing a great job with that property!

Pierre Guirguis · Answer

This really comes down to cost of capital and flexibility.

At 5.99% on a rate & term refi, your new payment is about $1,983. Compared to your current $2,273, that’s roughly $290/month in savings. If you include the $310 HELOC payment, your current total outflow is about $2,583.

Under the cash-out scenario:

New payment is ~$2,331.If you use the ~$30K proceeds to pay off the HELOC, that $310/month disappears.

So your all-in payment would be ~$2,331 versus ~$2,583 today - slightly lower and consolidated into one loan.

The real question is the HELOC rate.

If it’s variable and sitting above 7–8%, rolling it into a fixed 6.625% loan reduces risk. If it’s manageable and you value liquidity, locking 5.99% on the first and keeping the HELOC may be the stronger long-term move. Refinancing twice in six months to chase rates usually isn’t worth the closing costs unless there’s a clear downward trend.

From a portfolio standpoint, I’d lean:

- Lock the 5.99%- Keep the HELOC available as liquidity- Let the rental support both- Pay the HELOC down strategically

The only time I’d favor cash-out is if that $30K is going to produce a return meaningfully above 6.625%.

Erik Estrada · Answer

Do you have an itemized closing cost estimate for both options and have you done a cost benefit analysis yet?

Doug Smith · Answer

Ryan, you’re thinking about the right tradeoffs here, but I’d encourage you to slow the process down and look at the full cost picture, not just the rate. In practice, most refinances take well in excess of five years to truly recoup closing costs, even when they’re presented as “no‑fee,” because those costs are still embedded in the pricing. That’s why I’m generally very skeptical of refinancing twice in a short window; you’re essentially betting that rates fall more than most people expect and that the second refinance pays for both transactions, which historically is a tough bet. Personally, I don’t see rates coming down nearly as much as many borrowers are hoping, especially not in a way that makes serial refinances a clear win. When you run the numbers, the rate‑and‑term refinance plus the HELOC payment lands surprisingly close to the cash‑out payment anyway, just with less leverage and fewer long‑term consequences. Paying off the HELOC feels clean, but rolling that balance into a higher‑LTV loan permanently changes the risk profile of the property. I’d rather see a structure that still makes sense if rates stay flat for several years than one that depends on perfect timing. In most cases, disciplined leverage and predictable cash flow beat chasing incremental rate improvements.

Marcia Gilad · Answer

Just a few other things to factor in...your cash-out numbers look good, but don't forget about the closing fees, origination fees, lender's title insurance, etc. that come along with any loan. I'm a lender, so these things are always top of mind for me. If you haven't already, get a full term sheet so you see the true costs of the loan. I'm not sure what sort of loan you currently  have, but if there's a prepayment penalty, be sure to factor that in as well.

Regarding the HELOC, I'm always in favor of reducing rates where possible. So if you paid that off via a cash-out whose rate is lower, then that's a win. But I'd hold off on a cash-out until you have another property lined up so that you're not paying for money you're not using.

Mike Grudzien · Answer

You did a great job on analysis and overview.I look forward to seeing the answers provided here.