No-Cash-Out vs. Cash-Out Refinance – What is the Difference?

cash-out refinance

For most borrowers, there isn’t much competition when comparing no-cash-out and a cash-out refinance. 

To withdraw money from home equity, you will use the cash-out refinance option (provided you are eligible). This gives you a cash lump sum that you can use for any type of purpose. 

But if you are planning to refinance to obtain a lower interest rate, then you will use rate-and-term or a no-cash-out refinance. This might lower the mortgage payments that you pay monthly and help you to save money over the long term. 

No-Cash-Out Refinance Vs. Cash-Out Refinance

No-cash-out refinancing usually changes the loan term, the interest rate on the mortgage, or both. The aim usually involves saving money on the home loan, but you won’t be able to receive a cash-back. 

Cash-out refinance provides a cash lump sum at closing. The money is made available from home equity. The interest rates for cash-out refinance are usually higher than the no-cash-out loans, and it is also a bit more difficult to qualify. 

The correct refinance loan depends on what your goals are. If you are unsure about which of these programs to choose, ask a loan officer to assist you to compare each option so that you can compare no-cash-out vs. cash-out refinance.

What Is No-Cash-Out Refinance?

No-cash-out refinance is also known as rate-and-term refinance. 

If your goal involves changing the duration (term) of the loan, lowering your mortgage rate, or both, both these options will lower the payments you are making monthly, as long as you do not refinance to a term that is much shorter. 

Any type of refinancing involves replacing your current mortgage with another one. With rate-and-term refinance, the amount on your new loan will match up to your current mortgage balance. 

Closing Costs

You might be required to pay out of pocket for your refinance closing costs. This might be between 2 and 5% of the loan amount.  However, you might qualify for a no-closing-cost refinance. This could translate into lower mortgage payments and a lower rate without having to pay upfront fees.

It is important to note that no-closing-cost loans usually attract higher mortgage rates. This means you will pay for these costs over the duration of your loan. 

Streamline Refinances

Most mortgage types allow for Streamline refinancing. Streamline Refinance usually lowers the closing costs, paperwork, and time involved with rate-and-term refinance. However, you cannot take a cash-out with Streamline Refinance. 

Streamline Refinance options are typically available for USDA loans, VA loans, and FHA loans. 

For borrowers with a conventional mortgage backed by Freddie Mac or Fannie Mae, there are now new programs for loans designed to guarantee lower rates and reduce the costs involved for refinancing. However, to qualify for one of these programs your income will need to be low to moderate. 

What Is Cash-Out Refinancing?

Cash-out refinancing will also replace your current mortgage loan with another one. When it comes to no-cash-out vs. cash-out refinance, you have to consider with a no-cash-out refinance, the balance on your new loan will be larger when compared to what you are currently owing. The “extra” loan amount will be paid out to you in cash at closing. 

This process involves using your home equity “as collateral” in order to secure the cash-out loan. This option provides a way to borrow cash at lower interest rates. This can also turn out to be a more affordable method to obtain a large cash sum than using a personal loan or a credit card. 

Advantages Of Cash-Out Refinancing

Cash-out refinancing is often a lower-cost method to borrow large sums of cash. Most homeowners use cash-out refinancing options to fund a large expense that will usually increase the value of their home. 

Here are a few examples of the better uses for cash-out refinancing:

  • Pay for home renovations or improvements
  • Finance a startup business or pay for higher education
  • Cover unexpected and large medical bills
  • Consolidate high-interest debt
  • Buy an investment property or a second home

It is important to think very carefully before using cash-out refinance options to fund large events such as a wedding, a luxury vacation, or even an important anniversary party. If for example, you choose another 30-year mortgage, you will be paying this off for 30 years to come. 

What are the Drawbacks of Cash-Out Refinancing?

When comparing no-cash-out vs. cash-out refinance, cashing out is linked to a few drawbacks.

To begin with, you will probably end up paying a higher rate on your mortgage. The difference is usually 0.125 to 0.25% higher. If for example, your mortgage rate is 3.3% for rate-and-term refinance, you will probably end up paying between 3.425% and 3.55% to receive a cash-out. 

Your rate is also going to rely on the lender you have chosen, your current financial circumstances, along with the cash amount you plan to withdraw from your home equity. A mortgage refinance calculator is useful to determine what that will mean for your situation in cents and dollars. 

It is also important to realize that you will be paying a rate that is higher on a balance that is higher. If you didn’t take a cash-out, you would end up borrowing less. 

Lastly, you need to know that many of the lenders have increased eligibility criteria when it comes to cash-out refinance when compared to rate-and-term options. 

Your chances of approval increase when you have low monthly payments related to your other debt and a higher credit score than what you would require for rate-and-term refinance. 

How Much Equity Can You Cash Out When You Refinance?

You will only be allowed to cash out a percentage of the equity you have accumulated in your property unless your loan is a VA loan (which is an exception). 

Many of the lenders want to retain a minimum of 20% of the value of the home when doing cash-out refinancing. This means that your maximum LTV (loan-to-value ratio) is 80%. 

Here is an example to explain this further:

  • The value of the home: $350,000
  • The current balance on the loan: $200,000
  • The maximum amount on the new loan: $280,000 (80% LTV)
  • The maximum cash-back will = the new loan amount (The current balance)
  • The maximum cash-back: $80,000

Not all the lenders or mortgage types are that strict. But many are. And you will probably need to search hard for the lenders that will allow you to retain under 20% of the equity. 

Should You Use a Cash-Out Refinance?

In general, cash-out refinancing could make sense when you are using the money for a long-term smart investment that will provide a favorable financial return. You should only use this option when you require a large cash sum since closing costs typically involved will usually outweigh the smaller sum needed. 

At the same time, you should be able to afford the new loan once you have taken out cash-out refinancing. When refinancing ends up costing you a lot over the long term when you extend the loan term or the cash-out raises the interest rate, then cash-out refinancing is generally not a good idea. 

When cash-out refinancing doesn’t appear to be a good choice, don’t worry. There are usually other methods to obtain the money you need. For example:

1. HEL (Home Equity Loan)
This option allows you to retain your current mortgage, by taking out another mortgage over a shorter term of between 5 to 15 years. You then pay off each mortgage separately. The HEL is usually repaid in fixed and equal installments. 

2. Home Equity Line of Credit (HELOC)
Similar to a credit card and a Hybrid home-equity loan, you will be allowed to borrow cash up to a certain limit, repay the loan, and then re-borrow when you need it again. You then pay interest (usually variable) only on the current balance. This option usually has a lower upfront cost when compared to HELs and refinances. 

3. Personal Loan
These loans are unsecured and not regarded as a “second” mortgage. The rate is usually appreciably high unless you have an exceptional credit score and the rest of your finances are extremely stable. 

4. Zero or Low Setup Fees
Whether these options will be a better choice for you than cash-out refinancing depends on your goals, circumstances, and needs. But they are well worth checking out. 

No-Cash-Out vs Cash-Out Refinance: FAQs

Can You Get Cash-Back With No Cash-Out Refinance?

No, you can’t. Your opening balance on a new mortgage will have to match the “closing balance” on the current one. However, you might be granted a slightly bigger loan amount when your closing costs are rolled into your new loan. 

Will A Cash-Out Refinance Affect My Current Rate?

Yes. The rates for cash-out refinance are usually 01.125 to 0.25% higher when looking at no-cash-out vs. cash-out finance rates.

Will Cash-Out Refinancing Attract Increased Closing Costs?

Yes. In some cases, the closing costs are worked as a “percentage” according to the sum you are borrowing. Since you are borrowing more when it comes to cash-out refinancing, the upfront fees are usually higher. 

What Is The Maximum Loan-To-Value Ratio For No-Cash-Out Refinancing?

This varies according to the loan program. For example, the LTV ratio for conventional no-cash-out refinancing is typically 95-97%. FHA loans allow refinancing LTV ratios of up to 96.5%. The USDA and VA loans can sometimes permit up to 100%. 

What Is The Maximum LTV For Cash-Out Refinancing?

80% is typically the maximum LTV for cash-out refinancing. Yet there are a few exceptions to this rule. For instance, the VA cash-out refinancing allows for an LTV maximum of 100%, which means that an eligible borrower is allowed to cash out their entire home equity. 

Is There Income Tax Due On Cash-Out Refinancing?

According to Experian one of the credit bureaus. cash that is collected from cash-out refinancing is not considered income. This means you won’t be liable to pay tax on your cash out. Cash-out refinance is regarded as a loan rather than a form of income. However, we still suggest checking on tax advice from a professional and qualified adviser before relying on it. 

Who Can Qualify For Cash-Out Refinancing?

Most of the cash-out refinancing loans will require a credit score of 620 or higher, stable employment and income, and a debt load that is manageable. You will also need over 20% home equity in order to qualify. 

What Are The Current Refinance Rates?

The refinance rates are still regarded as low and with the values of homes skyrocketing across the nation, many homeowners have experienced exceptional equity growth. 

Regardless of whether you decide to cash out or you don’t, now would probably be the best time to consider refinancing. However, still, review all your available options to ensure you are getting a favorable deal when it comes to paying back your new mortgage.

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