What Is a 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 replaces an existing loan with the same principal value, or potentially less, but it does not allocate any money for spending cash to the borrower.
- A no cash-out refinance is a rate and term refinance because it focuses primarily on adjusting a borrower’s interest and terms without advancing new money.
- A no cash-out refinance is the opposite of a cash-out refinance, which does advance new money to the borrower.
Understanding a No Cash-Out Refinance
Refinancing a loan is an option for borrowers seeking to make favorable adjustments to a loan’s terms. Refinancings can be common for mortgage loans because of loan variety and the advantages that can be found in many different situations.
Typically, loan refinancings may be grouped into two categories: cash-out and no cash-out. In a cash-out refinancing, the borrower adds to their principal balance. In a no cash-out refinancing, the borrower refinances only the principal balance or possibly less.
A no cash-out refinanced loan is a common type of loan used in standard mortgage refinancing deals. It focuses on improving the interest rate the borrower is charged 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.
Both cash-out and no cash-out loans rely on the underlying real estate property as collateral. Key differentiators for considering cash-out vs. no cash-out can be the paid down balance along with accumulated home equity and the current loan-to-value. A borrower who has paid down a substantial portion of their mortgage may look to a cash-out loan refinancing because they have equity available. No cash-out refinancings do not increase the principal payoff or provide any additional funds.
Interest Rate Environment
Refinancing can occur in all types of market environments. However, they are especially popular when interest rates are falling. A falling interest rate environment provides the opportunity to capitalize on lower rates of interest offered by lenders. When rates are down, borrowers may choose to refinance their loans at a lower rate.
The mortgage lending market may also offer other opportunities for refinancing beyond just falling rates because of the many varieties of mortgage loans available. Borrowers have the option to choose from a multitude of mortgage loan variations, including:
- Fixed-rate mortgages
- Variable-rate mortgages
- Adjustable-rate mortgages
- Jumbo mortgages
- Government-insured mortgages
- Interest-only mortgages
Refinancing from one fixed-rate to a lower fixed-rate is often a motivator. However, when rates are rising, borrowers in variable-rate or adjustable-rate loans may also want to refinance to stop their interest rate costs from going any higher. Borrowers should be cautious and go thorough due diligence when refinancing a mortgage loan. There are several options for refinancing. Moreover, 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 available 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.