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.

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 are not advanced 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, 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 a higher principal amount. The additional principal is often used to improve the home, or to cover other costs.

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.

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.

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 longer 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 will not 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 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.

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.

Credit Score

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.

DTI Ratio

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 loan. 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.

Home Equity

The amount of home equity a borrower owns can play a role in their eligibility for a no cash-out refinance. If you borrow over 80% of your home’s value, 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.

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 closing costs on the new mortgage. Unlike cash-out refinances, these do not 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.