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No Cash-Out Refinance: A Guide

Ashley Kilroy4-minute read

December 03, 2020

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If you already own a home and are considering refinancing, then you might have heard of a no cash-out refinance. However, refinancing may look different for each borrower. Therefore, it’s crucial to understand the ins and outs of a no cash-out refinance before moving forward.

What Is A No Cash-Out Refinance?

A no cash-out refinance is when you refinance an existing mortgage for equal to or less than the current mortgage value, plus any additional loan settlement costs. A no cash-out refinance is a rate and term refinance because you are not advanced new money.

A cash-out refinance is when a person has equity in their home, and they choose to refinance at a higher principal amount. They may use this additional principal to improve the home or use it to cover other expenses.

A rate and term refinance is when a person changes the terms of their current mortgage and replaces them with more favorable terms. Reasons that a person might use a rate and term refinance is to lower interest rates or decrease monthly payments. 

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Pros & Cons Of No Cash-Out Refinancing

There are benefits and drawbacks of doing a no cash-out refinance. Some individuals may find that a no cash-out refinance is not for them, whereas others may realize that the pros outweigh the 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 terms: If your current mortgage has unfavorable terms such as high interest rates or is a 30-year 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 is a way 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 to use their equity to pay off other debts or make improvements to their homes. A no cash-out refinance will not give borrowers any cash to work with.
  • Terms 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. These include an adequate credit score, 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 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 will receive a hard inquiry on your credit report when you get preapproved for a refinance. This can decrease your credit score by several 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.

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 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.

Home Equity

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 will 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 only for what they still owe on their current mortgage’s principal, plus the costs of closing on the new mortgage. While other refinance options allow homeowners to get cash out with their refinances, no cash-out refinances are similar but do not offer a cash benefit.

No cash-out refinances have several benefits and considerations, so be sure to do your research before choosing how you will refinance your home. It’s wise to speak with a financial advisor or Home Loan Expert to get help as you decide what option is best for you.

If you would like more information on mortgages, homeownership, and more, be sure to check out our Learning Center. There, you will find resources like our refinance calculator and information on how you can talk to a Home Loan Expert to help you decide what refinance option is best for you.

Get approved to refinance.

See expert-recommended refinance options and customize them to fit your budget.

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Ashley Kilroy

Ashley Kilroy is an experienced financial writer. In addition to being a contributing writer at Rocket Homes, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.