What Is a No-Cash-Out Refinance? With a no-cash-out refinance, you can change the term and size of your current mortgage. Once the refinance is complete, the previous mortgage will be paid off by the new one.
With a no-cash-out refinance, you can change the term and size of your current mortgage. Once the refinance is complete, the previous mortgage will be paid off by the new one. After that, you’ll start making installment payments on the new mortgage. You cannot take any equity out of a no-cash-out refinance, in contrast to a cash-out refinance.
Let’s examine no-cash-out refinances, how they function, and how they differ from cash-out refinances.
Definition and Examples of No-Cash-Out Refinances
A no-cash-out refinance, also referred to as traditional refinancing, is exactly what it sounds like: It is a refinance that enables you to change the mortgage’s term, rate or both with a new loan. When employing a no-cash-out refinance, you cannot take any equity out of your home.
Additionally, you should be aware that a no-cash-out refinance has expenses, just like your first mortgage. Although banks frequently permit you to roll these charges into your new loan, they can also include closing costs, financing costs, and escrows. However, aside from this, you are not permitted to use the loan to cover more debt.
A limited-cash-out refinance, which functions similarly to a no-cash-out refinance, is offered by some borrowers. When this happens, you might add a little payment to your loan to compensate for expenses like paying closing charges, buying out a co-owner, or paying real estate taxes.
- Alternate names: Rate-and-term refinance, traditional refinance
How No-Cash-Out Refinances Work
Consider that you purchased your home four years ago, at the height of the local housing market’s price and interest rate cycles. To pay off your property as soon as possible, you and your partner took up an ambitious 15-year loan. Unfortunately, your partner quit working after developing a disability. Now, the monthly mortgage payment equals 50% of your monthly income, far exceeding the advised 28% rule that indicates that your mortgage should not be more than 28% of your monthly income your gross income.
You and your spouse won’t be able to make much more money, at least not right away. Both of you in this situation is thinking about a no-cash-out refinance. You merely want to lower the cost of your monthly mortgage payments; you don’t want to put any money in your pocket. In this instance, you will be able to drastically reduce those payments and fall within a healthier range for your salary by extending the length of your term from 15 to 30 years.
If interest rates have decreased since you first bought your house, you might also want to think about a no-cash-out refinance. Suppose you paid $400,000 for a house. You’re paying $4,500 a month with a 20% down payment, a 30-year term, and a 4.50% interest rate of $1,621 each month in principal and interest. This means that over the life of the loan, you’ll pay a total of $263,701 in interest.
However, prices are now less. Your bank is willing to refinance you for a 2.7% interest rate. Your monthly mortgage payments will drop to $1,297 at this rate, and you’ll pay a total of $147,248 in interest over the course of the loan.
Refinancing might save you up to $116,453 in interest over the following 30 years, depending on when you purchased your house, which makes a no-cash-out alternative highly appealing. Please note that these figures may vary based on the length of time you have kept your current loan.
No-Cash-Out Refinances vs. Cash-Out Refinances
|Cash-Out Refinance||No-Cash-Out Refinance|
|Creates a new mortgage; pays off the existing mortgage||Creates a new mortgage; pays off the existing mortgage|
|Allows you to change rate, term, or both||Allows you to change rate, term, or both|
|Allows you to withdraw equity from your property and put cash into your pocket||Does not allow you to add to your loan balance other than eligible closing costs|