What Is a No Cash-Out Refinance?
A no cash-out refinance refers to the refinancing of an existingmortgagefor an amount equal to or less than the existing outstanding loan balance (plus any additional loan settlement costs). It is done primarily to lower the interest rate charge on the loan and/or to change some of the terms of the mortgage.
A no cash-out refinance is a type ofrate and term refinance, and can be contrasted with a cash-out refinance.
Key Takeaways
- A no cash-out refinance replaces an existing loan with the same principal value, or potentially less, but it does not allocate any money for spending cash to the borrower.
- A no cash-out refinance is a rate and term refinance because it focuses primarily on adjusting a borrower’s interest and terms without advancing new money.
- A no cash-out refinance is the opposite of a cash-out refinance, which does advance new money to the borrower.
Understanding a No Cash-Out Refinance
Refinancing a loan is an option for borrowers seeking to make favorable adjustments to a loan’s terms. Refinancings can be common for mortgage loans because of loan variety and the advantages that can be found in many different situations.
Typically, loan refinancings may be grouped into two categories: cash-out and no cash-out. In a cash-out refinancing, the borrower adds to their principal balance. In a no cash-out refinancing, the borrower refinances only the principal balance or possibly less.
A no cash-out refinanced loan is a common type of loan used in standard mortgage refinancing deals. It focuses on improving the interest rate the borrower is charged on the loan in order to facilitate cost savings. It may also shorten or lengthen the duration of the loan to better serve the borrower.
Both cash-out and no cash-out loans rely on the underlying real estate property as collateral. Key differentiators for considering cash-out vs. no cash-out can be the paid down balance along with accumulated home equity and the current loan-to-value. A borrower who has paid down a substantial portion of their mortgage may look to a cash-out loan refinancing because they have equity available. No cash-out refinancings do not increase the principal payoff or provide any additional funds.
Special Considerations
Interest Rate Environment
Refinancing can occur in all types of market environments. However, they are especially popular when interest rates are falling. A falling interest rate environment provides the opportunity to capitalize on lower rates of interest offered by lenders. When rates are down, borrowers may choose torefinancetheir loans at a lower rate.
The mortgage lending market may also offer other opportunities for refinancing beyond just falling rates because of the many varieties of mortgage loans available. Borrowers have the option to choose from a multitude of mortgage loan variations, including:
- Fixed-rate mortgages
- Variable-rate mortgages
- Adjustable-rate mortgages
- Jumbo mortgages
- Government-insured mortgages
- Interest-only mortgages
Refinancing from one fixed-rate to a lower fixed-rate is often a motivator. However, when rates are rising, borrowers in variable-rate or adjustable-rate loans may also want to refinance to stop their interest rate costs from going any higher. Borrowers should be cautious and go thorough due diligence when refinancing a mortgage loan. There are several options for refinancing. Moreover, a borrower’s new loan terms will typically last through the loan’s remaining duration so it is important that the borrower negotiate the best terms possible.
Borrowers opting for a longer-term maturity in a no-cash out loan may not realize that even with refinancing at a lower rate they will pay moreinterestover time. Many borrowers seeking no cash-out loans may also overlook the opportunity to obtain additional funds from the equity available in their home at a borrowing rate that can be lower than traditional home equity loans or home equity lines of credit.
Fees will also be a factor for any type of mortgage loan refinancing. Most refinancing transactions involve additional direct costs, which most borrowers roll into the balance of the new mortgage.
FAQs
A no cash-out refinance refers to the refinancing of an existing mortgage for an amount equal to or less than the existing outstanding loan balance (plus any additional loan settlement costs). It is done primarily to lower the interest rate charge on the loan and/or to change some of the terms of the mortgage.
Why you should not do a cash-out refinance? ›
Cons of cash-out refinance
Your interest rate might go up: You may qualify for the best rate around, but if interest rates have risen substantially since your original mortgage, odds are you'll pay more on your new loan. And since the new mortgage is bigger, you'll be charged more in interest too.
How can I get cash out without refinancing? ›
Yes, you can take equity out of your home without refinancing your current mortgage by using a home equity loan or a home equity line of credit (HELOC). Both options allow you to borrow against the equity in your home, but they work a bit differently.
What is the difference between limited cash out and no cash-out refinance? ›
A limited cash-out refinance allows you to add your refinancing costs to your new loan, while a no cash-out refinance pays just your current loan balance off, leaving more equity in your home.
Is it hard to qualify for a cash-out refinance? ›
Most lenders require you to have a credit score of at least 580 to qualify for a refinance and 620 to take cash out. If your score is low, you may want to focus on improving it before you apply or explore ways to refinance with bad credit.
Is it better to get a HELOC or cash-out refinance? ›
Compared to HELOCs, cash-out refinances are less risky for lenders, meaning they are often able to provide lower interest rates – though you may need to anticipate higher upfront fees in the form of closing costs.
Is it bad to cash out equity in your home? ›
Cash-out refinance rates are generally higher than those offered on regular refinances. Turning equity into debt increases the odds you could lose your home to foreclosure, and lenders pass this risk on to you with higher rates.
What is the cheapest way to get equity out of your house? ›
A home equity line of credit, or HELOC, is typically the most inexpensive way to tap into your home's equity.
Can you do a 100% cash-out refinance? ›
Can I do a 100% VA cash-out refinance? Yes! As mentioned above, most lenders will allow you to refinance up to 100% of your loan-to-value ratio (LTV) in a VA cash-out refinance. However, some will only permit you to borrow a maximum of 90% of your home's appraised value.
Are HELOCs a good idea? ›
HELOCs have the most flexibility in terms of how much you can borrow and when you can pay it off, compared with other home equity products. Their structure can help you keep your monthly payments down and avoid unnecessary debt and interest.
A Type 1 cash-out refinance occurs when the loan amount of the new loan is less than or equal to 100 percent of the payoff amount of the loan being refinanced. A Type 2 cash-out refinance occurs when the loan amount of the new loan is greater than 100 percent of the payoff amount of the loan being refinanced.
What is the max cash-out refinance? ›
For a conventional cash-out refinance, you can take out a new loan for up to 80% of the value of your home. Lenders refer to this percentage as your “loan-to-value ratio” or LTV.
Is cash-out refinance a good option? ›
A cash-out refinance allows you to use the equity in your home to fund home renovations, pay off your debt or finance another large expense. It could be a smart money move if you can qualify for a lower interest rate. Also consider options such as a HELOC or a home equity loan.
How much does it cost to do a cash-out refinance? ›
A cash-out refinance comes with closing costs comparable to your first mortgage. Typically, you can expect to pay between 2% and 5% of the loan amount.
Does cash-out refinance hurt your credit? ›
Cash-out refinances can have two adverse impacts on your credit score. One is the replacement of old debt with a new loan. Another is that the assumption of a larger loan balance could increase your credit utilization ratio. The credit utilization ratio makes up 30% of your FICO credit score.
Do you lose your interest rate with a cash-out refinance? ›
In a cash-out refinance, a new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash. You usually pay a higher interest rate or more points on a cash-out refinance mortgage compared to a rate-and-term refinance, in which a mortgage amount stays the same.
Do you lose equity in a cash-out refinance? ›
The bottom line. You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.
What are the tax implications of doing a cash-out refinance? ›
No, the cash you receive from a cash out refinance isn't taxed. That's because the IRS considers the money a loan you must pay back rather than income. There could even be tax benefits depending on how you use the money.
Does a cash-out refinance require closing costs? ›
A cash-out refinance comes with closing costs comparable to your first mortgage. Typically, you can expect to pay between 2% and 5% of the loan amount. So on a $200,000 home loan refinance, you could pay between $4,000 and $10,000 in closing costs.
