When you apply for a loan to refinance your home, you will need to write down what your purpose is for refinancing your loan. This isn't an essay question; there are a few specific refinancing purposes that you can list on your loan application. What you list depends on your motivation for refinancing in the first place.
With a cash-out, you are tapping into the equity that you have built up in your home. The equity is basically the difference between what you still owe on your home and what it is worth — it is the amount of money you would get if you were to sell your home and settle your debts. With a cash-out, you are getting access to that money now, which means your mortgage will increase. However, you can use that tapped equity in many ways. You can use it to help improve your home and thus further improve its value, or you could use that money to consolidate debt.
#2: Limited Cash-Out
With limited cash-out, you are getting a little bit of money back that you can use as you see fit. With a limited cash-out, you are generally only getting a couple of thousand dollars of cash. You can refinance to reduce your overall payment by extending your loan terms. You can have your closing costs added to your total loan costs.
A limited cash-out is about reducing your payment.
With a rate-and-term, you are not getting any money back. Rather, you are taking advantage of lower interest rates due to changes in the marketplace or changes in your credit score to save money over your loan's lifetime.
With a rate and term, you are generally shortening the terms on your loan as well. For example, you may be shortening a thirty-year loan into a fifteen-year loan. With a shorter loan term, you will be able to build equity faster in your home and pay off your loan faster while spending less money in interest.
A streamlined loan is all about lowering your payments. This type of refinancing is typically used on loans where you have to pay for mortgage insurance since you were allowed to place a smaller down deposit. Once you have built up a certain amount of equity in the home, you can refinance and stop paying mortgage insurance, which will reduce your loan cost. With streamlined refinancing, your home isn't reappraised and your income isn't verified again.
Knowing why you are refinancing will allow you to know what to put for the purpose when you are completing the paperwork to refinance your home.