When Should You Get a No-Cash-Out Refinance?

Learn about the benefits and drawbacks of refinancing without having to pay more money

Homeowners refinance their mortgages for a variety of reasons, including paying off debt, renovating or repairing their homes, or saving money by lowering their interest rate or monthly mortgage payment. Cash-out and no-cash-out refinancings are the two most common types of home loan refinancings. A cash-out refinance allows you to replace your present mortgage with a larger one in order to gain access to additional funds. On the other hand, a no-cash-out refinance replaces your existing loan with a new one with a different (typically lower) interest rate or term, but you don't normally get any cash back. If you're considering refinancing your mortgage, here's what you need to know about the no-cash-out and cash-out options.

What Is a No-Cash-Out Refinance?

A no-cash-out refinance, often referred to as a "rate and term refinance," is a technique to replace your current home loan with a new one that has a lower interest rate and/or a shorter term. People who qualify for a lower interest rate and thus a reduced monthly payment might consider a no-cash-out refinance. It may also be a viable option for those looking to move to a shorter-term loan (like going from a 30-year mortgage to a 15-year mortgage). Another reason to refinance is to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or to switch from an FHA loan (with mortgage insurance) to a conventional loan. The borrower must meet the closing costs out of pocket with a no-cash-out refinance. Closing costs might also be folded into the new loan, increasing the principal amount owed. Borrowers may get cash payments at closing with a no-cash-out refinance, despite the term. These payments are limited at 1% of the new total loan amount or $2,000, whichever is greater, and are added to the principal for a Freddie Mac-backed loan. In contrast, with a cash-out refinance, you borrow additional funds from your home's equity in addition to paying off your existing loan, which you receive as a lump-sum cash payout at closing. That money is added to the new loan, increasing the principal. Keep in mind that because the lender's risk is greater, the application procedure and borrower eligibility requirements for a cash-out refinance may be more severe. Because you're borrowing more money with a cash-out refinance, your monthly obligation will be larger. From the perspective of the lender, this indicates that you are more likely to default on the loan. Because you're not borrowing any extra money, the process and qualifying requirements for a no-cash-out refinance are usually less stringent. As a result, the lender's risk is substantially reduced.

No-Cash-Out Refinance vs. Cash-Out Refinance

No-Cash-Out Refinance Cash-Out Refinance
Loan Principal  The situation remains unchanged (except for any closing costs or fees rolled into the loan) The principle is increased by the amount of money borrowed.
Reasons for Refinancing Reduce your interest rate, cut your loan term, or change your lending program. Use home equity to obtain funds for a variety of objectives, including debt consolidation and repayment, as well as house upgrades and repairs.
Cash Payment Provided to Borrower Yes, but only for a limited time. Cash payments on Freddie Mac-backed mortgages are limited to 1% of the new total loan amount or $2,000, whichever is greater. Cash payments on Fannie Mae-backed mortgages are limited to 2% of the new total loan amount or $2,000, whichever is less. Yes 
Eligibility Requirements Over a 95% loan-to-value (LTV) ratio (the current value of the home vs. the loan principal) More than 20% equity in the home; LTV ratio of 80% or fewer
Interest Rates Ususally lower than the previous loan May be higher than previous loan

Refinancing with No Cash-Out vs. Refinancing with Limited Cash-Out

You could hear the term "limited cash-out refinance" in addition to cash-out and no-cash-out. No-cash-out refinancings are referred to as "no-cash-out refinancings" by Fannie Mae, and they work in the same way. The application process for a restricted cash-out refi is identical to that of a no-cash-out refi backed by Freddie Mac, but there are a few minor differences. Limited-cash-out borrowers can roll any closing costs, fees, and mortgage points into the new loan, as well as receive a little cash payout, much like no-cash-out borrowers. A limited cash-out refinance, on the other hand, has a cash-at-closing restriction of $2,000 or 2% of the entire new loan amount, whichever is smaller. A Freddie Mac no-cash-out refinance, on the other hand, permits you to take $2,000 or 1% of the new total loan amount, whichever is greater, at closing.  If you're not sure who backs your loan or need help understanding the specific requirements of your numerous refinance alternatives, talk to your broker or lender, who can explain everything in detail.

When Should You Consider a No-Cash-Out Refinance?

The sort of refinancing that most borrowers must choose is a big decision that must be made upfront. The no-cash-out option may be preferable in the following situations:
  • If you wish to lower your interest rate, do the following: Lenders can inform you if you qualify for a lower rate and how much money you'll save on your monthly mortgage payment.
If you wish to reduce the length of your loan or transfer loan programs: There are occasions when switching from a 30-year to a shorter-term loan makes financial sense (like a 20-year or a 15-year). Because shorter-term mortgages typically have lower interest rates, you may be able to save a large amount of money over the life of the loan without significantly increasing your monthly payment—for example, if you're approaching retirement and want to pay off your home faster. In that instance, a no-cash-out refinance would be a good idea. In some cases, you may want to switch from an FHA loan to a conventional loan to avoid having to pay mortgage insurance.
  • You want to improve your chances of being accepted. Because of your programs, you maytaking out a substantial sum of money with a no-cash-out refinance, and it may be easier to obtain approval for the loan for a variety of reasons. For starters, you will not require as much equity in your property. Refinancing may not even necessitate a home appraisal. A cash-out refinance, on the other hand, increases the size of your debt. As a result of the increased risk to the lender, the standards tend to be more stringent. To qualify, you usually need to have your home assessed and have a higher-than-average credit score, which makes it more difficult to get accepted.

When a Cash-Out Refinance May Be More Beneficial

Even though it increases the overall loan amount, there are some scenarios where a cash-out refinance makes sense. Borrowers may benefit from receiving a large cash payout in a variety of situations, including
  • Make improvements, repairs, or renovations to your house.
  • Getting out of debt with a high-interest rate
  • Taking advantage of major interest rate reductions while keeping monthly mortgage payments at a manageable level
It is all up to you. Your lump-sum payoff from a cash-out refinance has no restrictions on how you can utilize it. When you apply for a cash-out refinance loan, keep in mind that you're putting your house up as collateral. Make sure you're not taking on more debt than you can handle, as falling behind on payments could result in you losing your home.

Final Thoughts

A cash-out refinance could be useful and cost-effective if you have enough equity and some financially reasonable reasons for taking out the extra cash (such as removing a debt burden or improving the value of your house with an update). However, keep in mind that using this method may include a more rigorous application process, a higher interest rate, and a larger monthly (and long-term) cost (and risk) for you. For the vast majority of borrowers, a no-cash-out refinance is easier, less risky (because you're not taking on the additional debt), and more likely to be an approved option.

Most Commonly Asked Questions (FAQs)

What is the cost of refinancing a mortgage?

Closing fees are incurred while refinancing a mortgage and are identical to those incurred when purchasing a property for the first time. Closing fees typically range from 3% to 6% of the loan amount, though this varies. 

How often may a mortgage be refinanced?

If you qualify, you can refinance your mortgage as many times as you want, but it's rarely cost-effective because you'll have to pay closing costs each time. However, if interest rates decrease significantly, it may be worthwhile. Repeat refinances (defined as two or more refinance loans in a one-year period) accounted for 10.1 percent of refinances in 2020, when interest rates were at historic lows, according to Freddie Mac. 

When should you refine your mortgage?

If you don't plan on moving in the near future and have good credit and a steady income, refinancing may make sense if you can get a better interest rate or loan terms (like removing private mortgage insurance or shortening the length of the loan).

When it comes to refinancing a mortgage, how much time does it take?

A refinance application normally takes one to two months to process. According to ICE Mortgage Technology's Origination Insight Report, the average time to close a refinance loan in 2021 was more than 50 days due to reduced interest rates and increased demand.

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