Let’s take a look at no-cash-out refinances, how they work, and their differences when compared to cash-out refinances.
Definition and Examples of No-Cash-Out Refinances
Also known as traditional refinancing, a no-cash-out refinance is exactly as it sounds: It is a refinance that allows you to change the term length, the rate, or both with a new mortgage. You aren’t able to withdraw any equity from your property when using a no-cash-out refinance. You’ll also want to be aware that similar to your first mortgage, there are costs associated with a no-cash-out refinance. These can include closing costs, financing costs, and escrows—although banks often allow you to roll these costs into your new loan. Other than this, however, you can’t extend the loan beyond your existing debt. Some borrowers offer a limited-cash-out refinance, which works similarly to a no-cash-out refinance. In these cases, you can add some small amount to your loan to cover costs such as real estate taxes, buying out a co-owner, withdrawing very limited sums of money, or paying for closing costs.
Alternate names: Rate-and-term refinance, traditional refinance
How No-Cash-Out Refinances Work
Let’s say you bought a home four years ago, right when home prices and interest rates in your area were at their peak. You and your partner went for an ambitious 15-year-loan to pay off your property as quickly as possible. Unfortunately, your partner has since become disabled and has stopped working. Now, the monthly mortgage amount equals 50% of your monthly pay—well above the recommended 28% rule that states your mortgage should not exceed 28% of your gross income. Neither you nor your partner will be able to generate much more income—at least for a long time. In this case, you’re both considering a no-cash-out refinance. You don’t want to put any cash in your pocket; you simply want to reduce the cost of your monthly mortgage payments. In this case, by changing the length of your term from 15 to 30 years, you’ll be able to significantly lower those payments and fall within a healthier range for your income. You may also want to consider a no-cash-out refinance if interest rates have fallen since you first acquired your property. Let’s say you purchased a home for $400,000. With a 20% down payment, a 30-year term, and an interest rate of 4.50%, you’re paying $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. Now, however, rates are lower. Your bank has offered to refinance you with an interest rate of 2.7%. At this rate, your mortgage payments will drop to $1,297 and the total amount of interest you’ll pay over the life of the loan will be reduced to $147,248. Depending on when you bought your home, refinancing could save you up to $116,453 in interest over the next 30 years, making a no-cash-out option very compelling. Be aware that these numbers can change depending on how many years you’ve held your existing loan.
