Cash-out and no cash-out refinances are two types of mortgage refinancing but are used for different purposes:
- Cash-out refi. Replaces your current mortgage with one for a higher amount — so you can “cash out” the difference. Many homeowners choose cash-out refis to pay off debt, for remodeling projects or put a down payment on an investment property.
- No cash-out refi. Lets you change your rate or your loan terms — or both — so you can save money. Refinancing may be worth it if you can shave 0.75% to 1% off your current rate, or if you want to get rid of FHA mortgage insurance when your equity reaches 20%.
Here’s a closer look at how each works.
Cash-out vs. no cash-out refinancing
The main difference between cash-out and no cash-out refinancing is that you’re taking on more debt with a cash-out refinance by obtaining a bigger loan.
Here’s what you can do with cash-out and no cash-out mortgage refinances:
|Can I access my equity for a range of needs?||Yes||No|
|Can I change the interest rate on my loan?||Yes||Yes|
|Can I change the repayment term of my loan?||Yes||Yes|
|Can I get rid of private mortgage insurance (PMI) once my equity reaches 20%?||Yes||Yes|
|Do I need to pay closing costs?||Yes||Yes|
What’s a cash-out refinance?
A cash-out refinance is best for borrowers who have enough equity built up in their homes to borrow against it. With a cash-out refinance, you replace your current mortgage with a brand new mortgage for a higher amount. The difference between the amounts is the “cash out” portion.
Old mortgage balance: $400,000
New mortgage balance: $450,000
Cash out: $50,000 (less closing costs)
You can do a cash-out refinance on any type of mortgage, including conventional and government-backed loans.
How much can I take out with a cash-out refinance?
Regardless of how much equity you have, you probably can’t tap into all of it: Most lenders require you to have at least 20% equity in your home at the time of refinancing. However, some loans — like the VA cash-out refinance — may allow a 100% loan-to-value (LTV) cash-out refinance.
But you must carefully consider if you want to take on more debt than you currently have. Your monthly payments will be higher, and it puts you at greater risk of foreclosure if you can’t manage the extra debt.
What’s a no cash-out refinance?
Also known as a rate and term refinance, a no cash-out refinance is designed to help you save money by allowing you to secure a lower interest rate. Even a 0.75% reduction in your rate could save you thousands over the long run.
At the time of refinancing, you can also:
- Change your interest rate type from variable to fixed, or vice versa.
- Get rid of mortgage insurance on an FHA loan when your equity reaches 20%.
- Change your loan’s repayment term by either shortening or lengthening it.
A rate and term refinance is possible on any type of mortgage, including conventional and government-backed mortgages. There are also reduced paperwork streamline refinance programs for FHA, VA and USDA loans.
When should I consider refinancing?
Some experts suggest refinancing your mortgage when you can shave 0.75% to 1% off your current rate. But it only makes sense to refinance if you’re planning on staying in your home long enough to recoup your closing costs in the form of reduced interest payments, aka “the breakeven point.”
What is limited cash-out refinance?
A limited cash-out refinance lets you take out a small amount of cash when refinancing. Borrowers can get the lesser of 2% of the new mortgage amount or $2,000, according to Fannie Mae. Specific LTV requirements also apply.
One advantage of a limited cash-out refi is that you may be able to roll your closing costs into the new loan amount. This means you don’t pay them up front but instead increase your repayment amounts as part of the loan.
Another way to avoid paying closing costs is to get a no-closing-cost refinance — but these typically come with higher rates.
When to get a cash-out refinance
The main reason for a cash-out refinance is to get cash out — but because it costs money to refinance, it’s best to switch when you can lower your interest rate at the same time.
Here are some situations when a cash-out refi makes sense:
To consolidate high interest debt
If you’re in the process of paying off high-interest student loans or credit cards, a cash-out refi can give you the cash you need to pay out these loans and refinance the debt at a lower mortgage interest rate. However, this strategy only works if the savings you generate from reduced interest are greater than the closing costs and fees from refinancing.
To pay for home improvements
If you want a new kitchen or roof, refinancing your home to get cash out may be cheaper than other forms of financing like a personal loan. In some cases, home improvements can increase your home’s value, and depending on the type of improvement, the loan interest may be tax-deductible.
Keep in mind you can also get cash out with a home equity loan or home equity line of credit (HELOC) without having to pay closing costs in many cases.
To buy an investment property
Cash-out refinancing can help you use your home’s equity to buy an investment property that can generate income for your retirement or help build up your nest egg when the property increases in value. But buying a second property increases your debt load and can be risky if you’re relying on rental income to make an additional mortgage payment.
When to get a rate and term refinance
The main reason to get a rate and term refinance is to save money by getting a lower interest rate or changing your loan’s terms. Here are some situations when doing a term and rate refinance makes sense:
To lower the interest rate on your mortgage
Even a 0.75% to 1% decrease in your mortgage rate could save you thousands of dollars over the long run.
For example, if you have a $300,000 mortgage at 6.5% that you’ve been paying for three years and you refinance to 5.5%, you’ll save $183 a month and over $5,465 in total interest paid. If you can lower your rate by 1.5%, you can save nearly ten times that — or over $51,000 in total interest paid.
As long as you stay in the house long enough to recoup your refinancing closing costs in the form of reduced payments, it can be a smart financial move.
To remove private mortgage insurance
If you have an FHA loan, you must pay mortgage insurance even when you reach 20%. Refinancing allows you to switch to a conventional loan so you can get rid of mortgage insurance once your home equity reaches 20%. This can save you hundreds of dollars a year, which you can use to pay down your mortgage principal faster.
Switch to a lower fixed interest rate
If you have a variable-rate mortgage with an intro period that’s about to expire, refinancing can help you secure a fixed-rate loan. This can be advantageous when rates are low, and you want to lock in a low rate with predictable monthly repayments.
Compare refinancing options
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2 more ways to cash in on home equity
Doing a cash-out refinance isn’t the only way to access your home equity. Here are two more options:
- Home equity loans. Available as a fixed-rate loan, home equity loans give you a one-time lump sum payment that you repay over five to 30 years. Unlike refinancing, home equity loans may not charge closing costs or fees.
- HELOCs. Available as a variable-rate loan, a HELOC is a revolving line of credit that you can use like a credit card and pay back as you go. HELOCs typically have a 10-year draw period and a 20-year repayment period. Like home equity loans, HELOC lenders often don’t charge closing costs or extra fees.
Whether you choose a cash-out or no-cash refinance, compare lenders to find the best rates and terms for your needs. If you’re ready to move ahead, compare the top mortgage lenders for refinancing.