Reasons to Refinance Your Mortgage

There are various reasons why homeowners choose to refinance their home loans. Some may want to pay off bills, renovate their homes, or save money by lowering their interest rates or monthly mortgage payments.

Refinancing typically falls into either a cash-out or no-cash-out category. A cash-out refinance allows you to replace your existing mortgage with a larger one to access extra cash. Conversely, a no-cash-out refinance involves replacing your current loan with a new one that has a different interest rate or term, without receiving any cash back.

No-Cash-Out Refinance Explained

A no-cash-out refinance, also known as a "rate and term refinance," allows you to switch your current home loan for a new one with a different interest rate and/or term. This is a good option for individuals who qualify for a lower interest rate, leading to reduced monthly payments. It may also be beneficial for those looking to switch to a shorter loan term or from an adjustable-rate mortgage to a fixed-rate mortgage.

With a no-cash-out refinance, closing costs must be paid out of pocket. These costs can also be rolled into the new loan, increasing the principal amount. Despite its name, borrowers may receive cash payments at closing, usually capped at 1% of the new loan amount or $2,000.

No-Cash-Out vs. Cash-Out Refinance

When deciding between a no-cash-out and a cash-out refinance, it's crucial to understand the differences in terms of loan principal, reasons for refinancing, cash payments provided, eligibility requirements, and interest rates.

While a no-cash-out refinance maintains the loan principal and is suitable for lowering interest rates or switching to a fixed-rate loan, a cash-out refinance increases the principal by borrowing additional funds from home equity and providing a lump-sum cash payment at closing.

No-Cash-Out vs. Limited Cash-Out Refinance

In addition to cash-out and no-cash-out refinancing, there is also the concept of a limited cash-out refinance, which is akin to a no-cash-out refinance with minor distinctions in terms of cash payments provided at closing. Understanding the differences and requirements of each option is essential when making a decision.

When to Choose a No-Cash-Out Refinance

The no-cash-out refinance option may be more suitable for individuals looking to lower interest rates, switch loan programs, or move from an adjustable-rate mortgage to a fixed-rate loan. This may also be a better choice for those wanting to increase their chances of loan approval without borrowing additional funds.

When a Cash-Out Refinance Might Be Better

In some situations, a cash-out refinance may be preferred, especially when borrowers need funds for upgrades, repairs, debt consolidation, or home renovations. It provides flexibility in using the lump-sum payout, but borrowers should be cautious about taking on additional debt.

The Bottom Line

Deciding between a no-cash-out and a cash-out refinance depends on individual financial goals, equity, and risk tolerance. While a cash-out refinance offers immediate cash benefits, it comes with higher costs and risks compared to a no-cash-out refinance.