No Cash-Out Refinance: A Guide
Ashley Kilroy4-minute read
October 25, 2021
If you already own a home and are considering refinancing, you may have heard of a no cash-out refinance. Since everyone’s refinancing situation looks different from borrower to borrower, it’s crucial to understand what no cash-out refinancing means, and its advantages, before moving forward.
What Is A No Cash-Out Refinance?
A no cash-out refinance is when you refinance your existing mortgage for equal to or less than the current loan amount, plus any additional loan settlement costs. It's considered a rate and term refinance because you are not advanced new money; however, it can give you the ability to lower your interest rate or decrease your loan term.
Cash Out Vs. No Cash-Out Refinance
In contrast to a no cash-out refinance, where the lender only refinances an equal to or lesser amount of the remaining loan balance, a cash-out refinance is when a person has equity in their home, and they choose to refinance at a higher principal amount. The additional principal is often used to improve the home, or to cover other expenses.
There are also limited cash-out refinances, where the lender refinances at a higher principal amount and gives the borrower the difference between the estimated and actual loan amount that was paid off. This option offers similar advantages to a cash-out refinance, because the borrower can use the cash back in their home to pay for other expenses.
Pros & Cons Of No Cash-Out Refinancing
There are benefits and drawbacks of doing a no cash-out refinance. Whether an individual finds it favorable depends on their own circumstances, and requires a thorough look at all the possible pros and cons.
Refinancing is an important decision that can have a significant impact on a person’s financial situation. Here are some of the reasons that people choose to do a no cash-out refinance:
- Lower your mortgage payment: In some cases, a no cash-out refinance allows homeowners to lower their monthly mortgage payment It’s important to remember that if you choose to refinance at a longer term, you may end up paying more in interest over time than you would with your original mortgage.
- Change the loan terms: If your current mortgage has unfavorable terms such as high interest rates, PMI or a longer term, you may want to do a no cash-out refinance to get more favorable terms.
- Change lenders: Some people take out a mortgage and do not have a good relationship with their lender. Refinancing allows you to change lenders.
Refinancing isn’t for everyone. Here are a few potential drawbacks of no cash-out refinancing:
- No money advanced. Some people choose to refinance their homes so that they can use their home equity to pay off other debts or make home improvements. A no cash-out refinance will not give borrowers any cash to work with, so they may need to use a home equity loan or HELOC for home projects.
- A lower interest rate may not save you money. Some people think that if they get a lower interest rate by refinancing that they will save money over time. However, if you choose to refinance at a similar or longer term than your existing mortgage, you may end up paying more in interest over the life of the loan than if you kept your original mortgage.
- May extend your debt. Refinancing can be an excellent way to get better terms on a mortgage or get yourself out of a sticky situation. However, if you refinance at a longer term or make a habit of refinancing, you may end up with a lifetime of debt.
Eligibility Requirements For No Cash-Out Refinances
There are some requirements borrowers must fulfill to be eligible for a no cash-out refinance loan. These include an adequate credit score and debt-to-income ratio, and equity in their homes.
A borrower’s credit score plays a role in their eligibility for a no cash-out refinance. For example, if a person had a good credit score when they purchased their home, but their credit score has since fallen, they may not be eligible for a no cash-out refinance.
Before refinancing, you should check your credit score. It’s essential to know that you’ll receive a hard inquiry on your credit report when you get preapproved for a refinance. This can decrease your credit score by a few points. Therefore, you should do what you can to raise your credit score before applying for a refinance to ensure that you receive the best rates and are approved with ease. Consider also using a refinance calculator to determine your approximate rates and monthly payments given your current credit score.
A borrower’s debt-to-income (DTI) ratio plays a role in their eligibility for a no cash-out refinance as well. For example, if a person has taken on a lot of debt since purchasing their home, they may not be eligible for a new mortgage. Additionally, if a person or couple’s income has fallen significantly since they took out their original mortgage, they may not be eligible for a refinance.
Therefore, before you attempt to do a no cash-out refinance, you should try to decrease your debt-to-income ratio. This might mean paying off a student or auto loan or waiting until you get a raise at work.
The amount of home equity a borrower has can play a role in their eligibility for a no cash-out refinance. If you borrow over 80% of your home’s value, you'll be required to pay private mortgage insurance (PMI). This additional expense can negate the financial benefit of refinancing. Additionally, many companies will require homeowners to have a minimum of 20% equity in their home before offering a mortgage refinance.
The Bottom Line
A no cash-out refinance is when a person refinances their home for less than or the same amount they still owe on their current mortgage’s principal, plus the costs of closing on the new mortgage. Unlike cash-out refinances, these do not offer a cash benefit.
No cash-out refinances have several benefits and considerations, so you should do your research before choosing how you’ll refinance your home. It’s wise to speak with a financial advisor or Home Loan Expert as you decide what option is best for you.
If you'd like more information on mortgages, homeownership, and other real estate issues, be sure to check out our Learning Center. There, you'll find resources like information on how you can talk to a Home Loan Expert to help you decide what refinance option is best for you.
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