What is No Cash-Out Refinance
A no cash-out refinance refers to the refinancing of an existing mortgage for an amount equal to or less than the existing outstanding loan balance plus any additional loan settlement costs. It is done primarily to lower the interest rate charge on the loan and/or to change some of the terms of the mortgage. A no cash-out refinance is also known as a rate and term refinance.
BREAKING DOWN No Cash-Out Refinance
A no cash-out refinanced loan is a common type of loan used in standard mortgage refinancing deals. It focuses on improving the rate the borrower must pay on the loan in order to facilitate cost savings. It may also shorten or lengthen the duration of the loan to better serve the borrower.
No cash-out refinancings can be compared to cash-out refinancings. Both types of loans will rely on the underlying real estate property as collateral. Cash-out refinancings are an alternative type of mortgage loan that allows the borrower to take advantage of the equity in their home. In a cash-out refinance the borrower will apply for a principal amount that is greater than their outstanding loan balance. A borrower can receive a cash-out advance that is equal to or less than their home’s equity value. (See also: Cash Out vs. Rate/Term Mortgage Refinancing Loans)
Interest Rate Environments
Refinancing can occur in all types of market environments. They are especially popular when rates are falling. A falling interest rate environment provides the opportunity to capitalize on lower rates of interest offered by lenders. In this environment borrowers may choose to refinance their loan at a lower rate. In rising rate environments many adjustable rate mortgage borrowers may choose to refinance to a fixed rate mortgage in order to mitigate cost increases.
Borrowers should be cautious and do thorough due diligence when refinancing a mortgage loan. There are several options for refinancing and a borrower’s new loan terms will typically last through the loan’s remaining duration so it is important that the borrower negotiate the best terms possible.
Borrowers opting for a longer-term maturity in a no-cash out loan may not realize that even with refinancing at a lower rate they will pay more interest over time. Many borrowers seeking no cash-out loans may also overlook the opportunity to obtain additional funds from the equity in their home at a borrowing rate that can be lower than traditional home equity loans or home equity lines of credit.
Fees will also be a factor for any type of mortgage loan refinancing. Most refinancing transactions involve additional direct costs, which most borrowers roll into the balance of the new mortgage.