Cash-out refinancing vs. no-cash-out refinancing
For many borrowers, there isn't much competition between a cash-out or a no-cash-out refinance.
If you want to withdraw cash from your home equity, use a payout refinance (if you are eligible). This will give you a lump sum upon completion that can be used for any purpose.
However, if you just want to refinance yourself at a lower interest rate, use no-cash-out or rate-and-term refinancing. This can lower your monthly mortgage payments and save you big bucks in the long run.
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In this article (continue to …)
The central theses
Refinancing without a cash out will usually change your mortgage rate, repayment term, or both. Usually the goal is to save money on your home loan and you may not get any money back.
A cash-out refinance offers a lump sum in cash on completion. The money comes from your home. Interest rates are usually higher on a cash-out refinance than a no-cash-out loan, and it is a little harder to qualify.
The right type of refinancing loan depends on your financial goals. And if you're not sure which program to choose, your loan officer can help you compare options and find the right one.
Compare refinancing options. Start here (23.11.2021)
No cash out refinancing explained
Refinancing without cash-out is also known as rate-and-term refinancing.
In other words, your goal is to get a lower mortgage rate, change the "term" (duration) of your loan, or both. Each of them will reduce your monthly payments provided you don't refinance on a much shorter term.
Every refinancing means that you replace your existing mortgage with a new one. With an interest and term refi, your new loan amount corresponds to your existing mortgage balance.
You may have to pay the closing costs of the refinancing out of pocket. And that can be around 2-5% of your loan amount.
However, you can be offered refinancing with no closing costs. This can help you lower your rate and monthly mortgage payment without paying upfront fees.
Just keep in mind that no graduation loans are usually associated with a higher mortgage interest rate. So you end up paying that cost. Of course, there's nothing wrong with that, as long as you realize what's happening and you're cool about it.
Many types of mortgages allow streamline refinancing. Streamline refinancing usually reduces the time, closing costs and paperwork associated with interest and term related refinancing. However, you will never be able to make a withdrawal with a Streamline Refi.
Streamline refinancing options are available for FHA loans, VA loans, and USDA loans.
For those with conventional mortgages backed by Fannie Mae or Freddie Mac, there are new loan programs that can lower refinancing costs and guarantee a lower interest rate. However, you need a low or middle income to qualify.
Review your refinancing options with no cash out. Start here (23.11.2021)
Cash-out refinancing explained
A cash-out refinancing also replaces your existing mortgage loan with a new one. However, unlike a no payout refi, your new loan balance will be higher than you currently owe. This "additional" loan amount will be refunded to you as cashback upon completion.
You use home equity as collateral to secure your withdrawal loan. And that enables you to borrow money at a low interest rate. This can be a much cheaper way to get a large amount of cash than using credit cards or personal loans, for example.
Benefits of Cash-Out Refinancing
A cash out refinance can be an inexpensive way to borrow a large amount of money. Many homeowners use cash out refinancing to fund large expenses that ultimately add to their net worth.
Some of the best uses for a cash out refinance include:
Pay for home renovations or renovations Paying for a college education or a new start-up. Consolidate high-yield debt. Cover high, unexpected medical bills. Buy a second home or investment property
In the meantime, think carefully before using a cash-out refinance to fund a big event: a wedding, anniversary party, or a one-off vacation. Say you decide to take out a new 30-year mortgage, then you'll be paying for this tidbit – plus interest – for the next three decades.
Disadvantages of cash-out refinancing
When it comes to a cash-out refinance versus a no-cash-out refinance, the payout has some downsides.
To begin with, you will likely have to pay a higher mortgage rate than if you didn't want cash. And the difference is often 0.125-0.25% higher.
In other words, if you could get a mortgage rate of 3.3% on an interest-rate and timely refinance, you would likely pay between 3.425% and 3.55% to receive a payout.
Your exact interest rate will depend on the lender you choose, your financial circumstances, and the amount of cash you are taking out of your home. You can calculate what that means for you in dollars and cents with our mortgage refinancing calculator.
And of course you have to remember that you are paying that higher rate for a higher balance. Because if you weren't withdrawing cash, you would be borrowing less.
Finally, you should be aware that most lenders have higher eligibility criteria for refinancing with disbursement than those with interest and maturity periods.
You are more likely to be approved if you have higher creditworthiness and lower monthly payments on other existing debts than you would for an interest-paid, timely refinance.
Review your refinance withdrawal options. Start here (23.11.2021)
How much equity can I withdraw when I refinance?
Unless you have a VA loan, which is an exception, you can only withdraw some of the equity that you have built up in your home.
In fact, most lenders want you to keep at least 20% of the value of your home when you do a withdrawal refinance. This means that your maximum loan-to-value ratio (LTV) is 80 percent.
Let's take an example:
Home Value: $ 350,000 Current Loan Balance: $ 200,000 Max. new loan amount: $ 280,000 (80% LTV) Max. Cashback = New Loan Amount – Current BalanceMax cashback: $ 80,000
Not every lender or type of mortgage is this strict. But most are. And you will likely have to look for one that allows you to keep less than 20% equity.
Should you pay off a refinance or not?
As a rule of thumb, a cash-out refinancing makes sense if you are using the money for a smart, long-term investment with a good financial return. And you should only use one if you need a large amount of cash, as the associated closing costs will likely outweigh any small amount of cash needed.
In addition, cash-out refinancing only makes sense if taking out a new loan does not harm you financially. If refinancing would cost much more in the long run by extending the repayment period or increasing the interest rate, a cash-out refi may not be the best idea.
If cash out refinancing isn't the right choice, don't worry. There are likely other ways to get the funds you need. For example:
Home loan (HEL) – You keep your existing mortgage and take out a second mortgage with a shorter term, often 5-15 years. You pay both mortgages in parallel. And you usually repay the HEL in equal, fixed installmentsHome Equity Line of Credit – Kind of like a hybrid home loan and credit card. You can borrow up to your limit, repay and borrow again as often as you like. And you only pay interest (usually variable) on your current balance. Usually has lower up-front costs than HELs and refinancingPrivate loan – No second mortgage and therefore unsecured. So expect to pay a significantly higher interest rate unless your creditworthiness is great and your finances are exceptionally stable. Low or no setup fees
Whether any of these will suit you better than a cash-out refinancing depends on your personal goals, needs, and circumstances. But you should definitely check them out.
Cash-out refinancing vs. no-cash-out: FAQ
Can You Get Cash Back with a No Cash Out Refinance?
Sadly no. The opening balance of your new mortgage usually needs to be the same as the closing balance of your existing mortgage. However, you may be granted a slightly larger loan amount if you incorporate the closing costs into the new loan.
Will a cash-out refinance affect my rate?
Yes sir. The refinancing rates for disbursements are usually 0.125 to 0.25 percent higher than the rates for a comparable refinancing without a disbursement.
Does the cash-out refinancing have higher closing costs?
Yes sir. Some closing costs are calculated as a percentage of the amount you borrowed. And you're borrowing more money with a withdrawal refinance, so your upfront fees should be higher.
What is the maximum LTV for a refinancing without a cash-out?
That depends on your loan program. The maximum loan-to-value ratio with conventional no-cash-out refinancing is often 95-97 percent. FHA loans allow for a refinancing LTV of up to 96.5 percent. And VA and USDA loans can allow up to 100 percent.
What is the maximum LTV for a cash-out refinancing?
The maximum LTV for a cash-out refinancing is usually 80 percent. But there are a few exceptions to the rule. In particular, VA cash-out refinancing enables a maximum LTV of 100 percent, which means that eligible borrowers can withdraw all of their home equity.
Do you have to pay income tax on a cash-out refinancing?
No. Experian Lending Bureau states, “The money you raise from a cash-out refinance is not considered income. Therefore, you do not have to pay any taxes on this cash. Instead of counting as income, a cash out refinance is simply a loan. ”However, always check the tax advice you have read online with a qualified professional advisor before relying on it.
Who is eligible for cash-out refinancing?
Most cash-out refinance loans require a minimum credit score of 620, stable income and employment, and manageable debt. Additionally, you typically need well over 20 percent home equity to qualify.
How high are the refinancing rates today?
The refinancing rates are still low. And as property values skyrocket across the country, many current homeowners have seen unprecedented equity growth.
Whether you're making a withdrawal or not, now is generally a good time to get a refinance. However, do review all of your options to make sure you are getting the best deal on your new mortgage.
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