No Cash-Out Refinance: A Guide

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 less than or equal to the current loan balance, plus any additional loan settlement costs. It’s considered a rate and term refinance because you’re not borrowing new money; however, it can give you the ability to lower your interest rate or shorten your loan term.

Cash-Out Refinance Vs. No Cash-Out Refinance

In contrast to a no cash-out refinance, in which 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 chooses to refinance a higher principal amount. The additional principal is often used to improve the home or cover other important costs.

There are also limited cash-out refinances, in which the lender refinances at a higher principal amount and gives the borrower a maximum additional $2,000.

How Does A No Cash-Out Refinance Work?

A no cash-out refinance is one of the simpler types of refinancing because it involves changing only the loan’s term length and interest rate. Some homeowners do a no cash-out refinance to lower their monthly payment amount by reducing their interest rate. Other homeowners use it to take on a larger monthly payment in order to pay their mortgage off sooner.

Regardless of your reasons for wanting a no cash-out refinance, your home will be used as collateral to secure the loan. This means that in the event you stop making your mortgage payments, your lender can sell the property to recoup their losses.

Pros And Cons Of No Cash-Out Refinancing

A no cash-out refinance offers both benefits and drawbacks. Whether an individual finds it favorable depends on their own circumstances and requires a thorough look at all the possible pros and cons.

Pros

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 details: If your current mortgage has unfavorable details such as high interest rates, private mortgage insurance (PMI) or a long term, you may want to do a no cash-out refinance.
• Change lenders: Some homeowners take out a mortgage and end up not having a good relationship with their lender. Refinancing allows you to change lenders.

Cons

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 won’t give borrowers any cash to work with, so they may need to use a home equity loan or home equity line of credit (HELOC) for home projects.
• A lower interest rate may not save you money: Some homeowners think that if they get a lower interest rate by refinancing, they’ll 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 difficult 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

Borrowers must fulfill some requirements to be eligible for a no cash-out refinance loan. These include an adequate credit score and debt-to-income ratio (DTI), and equity in their homes.

Credit Score

A borrower’s credit score affects 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 temporarily 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 using a refinance calculator to determine your approximate rates and monthly payments given your current credit score.

DTI

A borrower’s DTI 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 loan. Additionally, if a person’s 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.

Home Equity

The amount of home equity a borrower owns can influence their eligibility for a no cash-out refinance. If you borrow over 80% of your home’s equity, you may be required to pay PMI. This additional expense can negate the financial benefit of refinancing. Additionally, some companies may require homeowners to have a minimum of 20% equity in their home before offering a mortgage refinance.

Can You Get Denied For A No Cash-Out Refinance?

If you don’t meet the minimum requirements, your application for a no cash-out refinance may not be approved. It’s important to know the requirements and your financial situation ahead of time so that you can make any improvements to your finances before applying for a no cash-out refinance.

The Bottom Line

A no cash-out refinance is when a person refinances their home for the same amount they still owe on their current mortgage’s principal, plus the closing costs on the new mortgage. Unlike cash-out refinances, these don’t offer a cash benefit.

No cash-out refinances have several advantages and disadvantages, 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 when refinancing is right for you.

Are you ready to get started on a no cash-out refinance? If so, start your application online today.