In this article
- Key Takeaways
- No-Cash-Out Refinance
- Closing Costs
- Streamline Refinances
- Cash-Out Refinancing Explained
- Benefits Of Cash-Out Refinancing
- Disadvantages Of Cash-Out Refinancing
- How Much Equity Can I Cash Out When I Refinance?
- Should You Cash Out Refinance Or Not?
- Can You Get Cash Back With A No-Cash-Out Refinance?
- Does Cash-Out Have Higher Closing Costs?
- What’s The Maximum Ltv For A Cash-Out Refinance?
For many borrowers, there is not much of a difference between a cash-out and no-cash-out refinance.
If you are looking to withdraw cash from the equity of your home, you will need the cash-out to refinance and prove eligibility. This will provide you with a lump sum of cash that can be used to meet any financial need.
On the other hand, if you are looking to refinance your loan with a lower mortgage rate, you can choose the no-cash-out refinance, also called the ‘rate-and-term’ refinance. This will reduce the payments you make to your monthly mortgage payments and can save you considerable cash in the long run.
A no-cash-out refinance will generally reduce the interest on your mortgage rate, loan term, or both. The goal is to save money that would otherwise go to home loans and this will not make you eligible for cashback.
Cash-out refinance, on the other hand, provides you with a sum of cash at closing. The cash you receive will also come from the equity of your home and interests are typically lower for no-cash-out refinancing than they are for cash-out refinancing. You may also find it harder to qualify for a cash-out than a no-cash-out.
The right option for you will ultimately depend on your financial goals. If you are not sure which of these options is the best for your immediate circumstances, you should speak with a loan officer who can take a closer look at your options and help you find the right fit for you.
The ‘no-cash-out’ refinance option is also referred to as the rate-and-term refinance.
This means that the ultimate goal of no-cash-out refinance is to reduce the rate of interest and the term as well, if possible. Each of these options will ultimately reduce the amount you will pay in monthly payments — so long as you do not refinance to a much shorter loan.
Any refinancing will mean replacing your existing mortgage with a new one. When you use the rate-and-term plan, your new loan will be the same thing as your existing balance.
There may be a fee for the closing costs of your mortgage that will have to be paid out of pocket. This can be around 2-5% of the full value of the loan.
Nevertheless, you could be offered a no-closing-cost refinance plan if you qualify. This will allow you to lower your mortgage rate without paying upfront fees.
The important thing to consider is that these no-closing-cost mortgages come with a higher mortgage rate, so in the end, you will still be paying the same price. Not that there’s anything wrong with that. Just be sure you know exactly what everything will be costing you in the long run.
Many of the mortgage options you will find available to you will allow for streamlined refinancing. This is a plan that offers refinancing without lost time, closing costs, paperwork, and other complexities often involved with rate-and-term refinancing. But you will not be able to apply for a cash-out refinance through a Streamline Refinance plan.
The only options available through Streamline Refinance are FHA loans, VA loans, and USDA loans.
For those holding conventional mortgages held by Freddie Mac or Fannie Mae, there is a new loan program that can considerably reduce the costs of refinancing and also provide lower rates. But you will have to prove low or moderate-income to qualify for these options.
Cash-Out Refinancing Explained
A cash-out refinance plan also replaces your current mortgage with a new mortgage loan. But, unlike the no-cash-out refinance plan, the new loan you will close will be even bigger than the last one. The ‘extra’ that will be added to your new loan will be returned to you in a lump sum at the closing of the deal.
What you are doing will be using the equity of your home to secure a cash-out loan. This allows you to take out a loan at the same interest rate. This could be a very affordable way to get your hands on a large sum of money without taking out a new line of credit, a credit card, or seeking personal loans.
Benefits Of Cash-Out Refinancing
A cash-out refinancing plan can be a good way to borrow a considerable amount of money. Many homeowners can use cash-out refinancing to cover larger expenses and pressing financial needs and this can ultimately increase their net worth.
For example, here are some of the uses for cash-out deals that can be especially beneficial:
Paying for improvements or renovations
Covering unexpected medical bills
Buying a second home
Paying for higher education or a new startup business
In the meantime, be very careful if you are considering using a cash-out refinance to fund a big event, such as a wedding, vacation, or any other once-in-a-lifetime activity. Considering you are working with a 30-year mortgage, you could be paying for that event for the next 30 years.
Disadvantages Of Cash-Out Refinancing
Comparing a cash-out refinance and a no-cash-out refinance, there are some major drawbacks to cashing out.
First of all, you are likely to end up with a higher mortgage than if you didn’t want the cash. And the difference can be as much as 0.125-0.25% higher. This means that if you could get a mortgage of 3.3% for the rate-and-term refinance, you will end up paying 3.425% to 3.55% to get a cash-out.
Now, the exact rate you will find will depend largely on the lender you are working with, your financial conditions, and how much cash you will be taking from your home’s equity. You can use our handy mortgage refinance calculator to get a better idea of what this might look like for you in terms of dollars and cents.
Don’t forget that you will also be paying a higher rate on a higher balance. Because you are taking the cash-out option, you are now increasing the amount of the loan.
As a final note on the topic of cash-outs, it should be noted that many lenders have higher eligibility criteria for providing cash-outs. You will have a better chance of applying if you have a strong credit score and make lower monthly payments on any other debts you have taken out.
How Much Equity Can I Cash Out When I Refinance?
Unless you are applying for a VA loan, you can only cash out a portion of the equity you have built up in your home. Most lenders will ask that you maintain an absolute minimum of 20% of your home’s equity when you cash-out. This means that the loan to value ratio is 80%.
Not all lenders and mortgage providers are so strict, but many are. And you will be hard-pressed to find one that is allowing you to retain less than 20% equity.
Should You Cash Out Refinance Or Not?
As a rule of thumb — and this applies to any sort of refinancing— a cash-out refinance is only a good idea using the cash for something smart — or, something that will vastly IMPROVE your financial situation. And you should only do so if you plan on borrowing a very large sum against your home’s equity as the closing costs alone will make any small loans a moot point.
Additionally, cash-out refinancing is only a good idea if taking out another loan is a financially responsible decision — in other words, you can afford the financial strain of a new loan. If refinancing your loan means that you will be spending far more than you had planned in the long run, then maybe going for the cash-out refinance is an especially bad idea.
But, not to worry, if cash-out refinancing is not the best option for you, there are other ways for you to get your hands on the things you need. For example:
Home equity loan (HEL) — You can keep your existing mortgage loan and take out a second with a shorter term, typically between 5-15 years. You will pay parallel mortgages and repay the HEL in fixed installments.
Home equity line of credit — This is like a combination between a credit card and an equity loan. You will be allowed to borrow up to a certain amount, make payments, and reborrow as often as you need. You will also pay interest on your current balance. This option has a lower upfront cost than a HEL.
Personal loans — This is not a second mortgage and therefore it is not secured. This means you will be looking at a considerably higher rate unless you have an immaculate credit score and stable financial situation — but there are no setup fees, or they are very low.
Whether or not one of these options will best suit your situation will depend utterly on you, the needs of your situation, and other details — but they are all worth checking out.
Can You Get Cash Back With A No-Cash-Out Refinance?
This is not a possibility. The opening of a new balance will have to equal that of the existing balance. But you may be allowed to expand the new balance a little if you will be rolling the closing costs into the new loan. You will need to check with your loan provider.
Does Cash-Out Have Higher Closing Costs?
Indeed, it does. Some closing costs will be calculated as a sum of the total amount you will be borrowing. Because you will be borrowing more with your cash-out refinance, your upfront fees could be increased.
What’s The Maximum Ltv For A Cash-Out Refinance?
The maximum Loan-to-Value ratio for a cash-out refinance is 80%. But there will be some exceptions to this rule. For example, when applying for a VA cash-out, the maximum LTV is 100%, which means that borrowers can receive the full value of their cash home.