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When Should You Get a No-Cash-Out Refinance?
Learn the advantages and disadvantages of refinancing without taking additional cash.
There are a slew of reasons why homeowners may decide to refinance their house loans, some of which include doing home repairs or renovations, paying off bills, or saving cash by decreasing the monthly mortgage payment or interest rate.
Home loan refinancing can be classified into: no-cash-out refinance or cash-out. A cash-out refinance is whereby you switch your current mortgage for a larger one, so you can obtain additional cash. When it comes to a no-cash-out refinance, you change your current loan with a new one with varying (usually lower) interest rates or terms, but you typically don’t obtain any money back.
If you’re thinking about refinancing your mortgage, here’s a comprehensive guide that will assist you to determine if you should go with a cash-out or no-cash-out refinance.
What is a No-Cash-Out Refinance?
Also referred to as a “rate and term refinance,” a no-cash-out refinance is a method of swapping your existing home loan for a new one with a changed term and/or interest rate.
A no-cash-out refinance is an ideal alternative for individuals who are eligible for a lower interest rate, bringing about a lower monthly payment. It may be an ideal option for individuals who want to change to a shorter loan term (switching from a 30-year mortgage to 15 years). Other reasons to refinance could be to shift from an FHA loan to a conventional loan or change an adjustable-rate mortgage to a fixed-rate mortgage.
In a no-cash-out refinance, the debtor is liable for taking care of all the closing costs. The closing costs can be rolled into the updated loan, which increases the loan amount, referred to as the principal.
In spite of its name, a no-cash-out refinance debtor may get cash payments at closing. When it comes to a loan financed by Freddie Mac, these payments are regulated at 1% of the updated loan total or $2,000, whichever is bigger, and are included in the principal.
Compare that with a cash-out refinance, where whereby stop paying your previous loan, you can also borrow extra money from your home’s equity, which you’ll get as a lump-sum payment during closing. That sum gets added to the new loan, which rises the principal.
Note that the application procedure and borrower qualification caveats may be stricter for a cash-out refinance since the lender is the one who stands to lose the most. You are asking for extra funds in a cash-out refinance, therefore, your payment responsibility is higher. From the lender’s viewpoint, you are more likely to be a defaulter. Alternatively, with a no-cash-out refinance, the eligibility prerequisites and application procedure are more relaxed because you’re not asking for more money. Hence, lender risk is significantly lower.
No-Cash-Out Refinance vs. Cash-Out Refinance
|No-Cash-Out Refinance||Cash-Out Refinance|
|Loan Principal||Stays identical (excluding any charges rolled into the loan or closing costs)||Increases the principal by the cash amount borrowed|
|Reasons to Refinance||Shorten loan term, Lower interest rate, or change to another loan plan||Use the equity in your home to acquire cash for various uses, like paying down or consolidating debt or home repairs or renovations|
|Cash Payment Offered to Debtor||Yes, for a limited amount|
When it comes to a mortgage financed by Freddie Mac, payable amounts are regulated at 1% of the updated loan total or $2,000, whichever is bigger
When it comes to a mortgage financed by Fannie Mae, payable amounts are capped at 2% of the updated loan total or $2,000, whichever is smaller
|Eligibility Requirements||More than 95% loan-to-value (LTV) ratio (the current value of the home vs. the principal loan amount)||20%+ home equity; LTV ratio of 80% or less|
|Interest Rates||Usually less compared to the previous loan||It May be more than the previous loan|
No-Cash-Out vs. Limited Cash-Out Refinance
Besides no-cash-out and cash-out, you may have encountered the phrase “limited cash-out refinance.” Fannie Mae uses this phrase for no-cash-out refinances, and it basically functions in the same manner. The application procedure for a controlled cash-out refi is identical to a Freddie-Mac-funded no-cash-out refinance, but there are a few small distinctions.
As with a no-cash-out refinance, regulated cash-out debtors can roll into any closing costs, mortgage points, and fees into the updated loan, and also get a small cash payment. Nevertheless, with a regulated cash-out refinance, the money during closing can’t go over $2,000 or 2% of the new loan amount, whichever is smaller. Compare that with a no-cash-out refinance from Freddie Mac, which permits you to acquire $2,000 or 1% of the new loan total, whichever is bigger, at closing.
If you’re uncertain which entity funds your loan, or if you require assistance understanding the unique prerequisites of your expansive refinance alternatives, you should consult with your lender or broker who can simplify things for you.
If you’re not ready for a conversation just yet, take 30 seconds to get your custom rate quote. In just a few simple questions you will be presented with all your rate and closing cost options.
When to Select a No-Cash-Out Refinance
A big decision that many debtors must make beforehand is which kind of refinance to get. Here are some circumstances that may make the no-cash-out alternative a viable alternative.:
You’re looking to decrease your interest rate: Lenders can inform you whether you’re eligible for a lower rate and whether you’ll save cash on monthly payments
Looking to switch from an ARM to a fixed-rate loan: Particularly in a low-rate setting, it could be the perfect opportunity to lock into a good rate and steer clear of the uncertainty associated with an adjustable-rate mortgage.
Looking to reduce the loan duration or change loan programs: There comes a time when it may be financially prudent to shift from a 30-year loan term to a diminished term loan (say a 15-year or a 20-year). Given how shorter mortgage terms often give reduced interest rates, you may save a considerable amount of cash over the lifespan of the loan without adding to your monthly payable amount too much – suppose you’re getting ready to retire and are looking to finish paying off your house loan more actively.
In what instance, a no-cash-out refinance would be the better option. In some cases, you may be looking to shift from an FHA loan (which mandates that you make mortgage insurance payments) to a conventional loan.
Looking to bolster your approval odds. With regards to a no-cash-out refinance, you aren’t looking to take out a considerable amount of money, which makes it easier for you to be approved for the mortgage loan for a number of reasons. Firstly, you don’t require as much home equity. Plus, you may not even require a house evaluation in order to refinance. Alternatively, a cash-out refinance rises the loan amount.
In this case, the lender stands to lose more, which is why the caveats tend to be tougher. You essentially need to have your house appraised and have acquired a beyond-average credit score to be eligible, making it hard to receive approval.
When a Cash-Out Refinance Might Be Better
There are instances whereby the best course of action to take is a cash-out refinance, even if it leads to an increment of the overall loan payable amount. Departing with a massive cash payment could assist debtors in various circumstances, including:
- Doing home renovations, repairs, or upgrades
- Settling high—interest debts
- Capitalizing on considerable interest rate drops without significantly raising monthly mortgage payable amounts
It really comes down to you. There are no limitations when it comes to how you utilize the payout you’ve acquired from a cash-out refinance.
Bear in mind that when you seek a cash-out refinance, you’re basically staking your house as collateral. Because of this, ensure that you’re not borrowing more than you can pay, given how your house is at stake and you could end up losing your house if you’re behind on your payments.
The Bottom Line
If you’ve got sufficient equity and solid financial reasons why you should be given additional money (such as appraising the resale value of your house with an improvement or taking out a debt burden), then you should consider taking out a cash-out refinance that could be both advantageous and affordable. However, you should note that that path may entail a stricter application procedure, an exorbitant interest rate, and a bigger expense (and risk) and your monthly requirement and over the long haul.
For most homeowners, seeking a no-cash-out refinance is usually the easiest, less adverse pathway (given you’re not adding onto additional debt), and you’ll be more likely to get ratified.
Frequently Asked Questions (FAQs)
How much does it cost to refinance a mortgage?
Mortgage refinance basically encompasses closing costs, the same as what debtors payout when they buy newbie homeowners. While the costs may be different, your closing costs could be between 3-6% of the total loan amount.3
How often can you refinance a mortgage?
Yes, you can! You can do it as much as you wish, presuming you’re eligible, though it’s seldom cost-efficient as you’ll have to payout closing expenses each time. Nevertheless, if there are significant interest rate fluctuations, it could be feasible. For instance, per Freddie Mac, recurrent refinances (described as over two refinance loans spanning a 1-year duration) culminated in 10.1% of refinances in the year 2020, when interest rates fluctuated to record lows.4
When does it make sense to refinance a mortgage?
If you aren’t looking to relocate for a while and have a stable income and strong credit score, refinance can be the best option for your case if you can get favorable loan conditions and interest rates (such as decreasing loan durations or taking away private mortgage insurance).
How long does it take to refinance a mortgage?
The refinance application processing procedure generally takes around 1 – 2 months. As a result of higher demand and reduced interest rates, the average duration to complete a refinance loan in 2021 has exceeded 50 days (data per ICE Mortgage Technology’s Origination Insight Report).