Limited Cash-Out vs. No Cash-Out Refinance: What’s the Difference?
If you’re considering refinancing your mortgage, you might be confused by all the refinance options available. What’s the difference, for example, between a limited cash-out refinance and a no cash-out refinance? How do you decide which one is right for you?
These two types of refinances are very similar, but there are some differences that we’ll outline in the guide below. Limited cash-out and no cash-out refinances also vary from cash-out refinances. Read more about how cash-out refinancing works here.
The guide below explains how limited cash-out refinances stack up against no cash-out refinances and offers tips to help you make the best refinancing choice for your goals.
- What is a limited cash-out refinance?
- What is a no cash-out refinance?
- Comparing the different types of refinances
- Basic eligibility requirements to refinance your mortgage
- Which type of refinance is right for you?
- The bottom line
What is a limited cash-out refinance?
A mortgage refinance is the process of borrowing a new mortgage to pay off your old one and getting better terms in the process. A limited cash-out refinance replaces an existing mortgage with a new one, but the new loan amount is slightly larger. This is because the refinancing costs are added to the balance instead of the borrower paying them out of pocket. While there will technically be no closing costs when the loan closes, you’re still responsible for paying them back over the long run.
As the name suggests, the cash back a borrower receives is “limited” — the amount can’t be higher than 2% of the new loan balance or $2,000, whichever is less. Unless your refinanced mortgage has a loan balance less than $100,000, it’s safe to bet that the $2,000 cash-out maximum would more than likely apply to your transaction.
The cash you receive from a limited cash-out refinance doesn’t come from equity, which differs from a standard cash-out refinance. Instead, it can come from reconciling the variances between the estimated and actual loan payoff amounts, said Pava Leyrer, chief operating officer at Northern Mortgage Services in Grandville, Mich.
“It’s extremely difficult to get right to the exact penny when you’re doing a refi. So nearly all of our Fannie (Mae) and Freddie (Mac) loans are run with a limited (cash-out refinance), because nobody wants to be to the penny on what they can get back or not (get) back,” said Leyrer. Remember, all of the related refinancing costs are being rolled into the new mortgage. Leyrer said these costs can include:
- Payoff amount for your old mortgage
- Title fees, recording fees and other closing costs
- Escrow account shortage
- Unpaid property taxes
Once the cost variances are reconciled, if the final loan amount is lower than what was estimated — for example, there’s a $1,900 difference — you’d receive that cash instead of reducing your loan balance by that amount.
If the final amount is higher than expected and the borrower ends up owing a balance, Leyrer said the next steps depend on each borrower’s individual situation. You may have to pay out of pocket to cover the difference, or perhaps your lender can increase your loan amount — if you have enough available equity.
What is a no cash-out refinance?
No cash-out refinancing is a type of mortgage refinance in which the borrower doesn’t receive any money from the transaction. The purpose might be to lock in a better mortgage rate, shorten your loan term or move from an adjustable-rate mortgage to a fixed-rate mortgage.
A no cash-out refinance is also referred to as a rate-and-term refinance, Leyrer said.
“You’re not trying to have a bunch of closing costs or get any money back or pay anything off like in a cash-out [refinance],” she explained.
With a no cash-out refinance, you can either pay your closing costs out of pocket or finance them into your new mortgage.
Comparing the different types of refinances
|Type of Refinance||Purpose|
|Limited cash-out refinance||
|No cash-out refinance||
Leyrer said nearly all of the conventional loan refinances her company processes use the limited cash-out option because it can be tedious trying to constantly account for every single fluctuation in costs up until the new loan is originated.
No cash-out refinances might be easiest for mortgage lenders or servicers who are refinancing a loan they already service, she said.
“They can just do the (loan) balance and keep their escrow and flip that thing pretty easily compared to someone else who doesn’t have the file and doesn’t own it and doesn’t have the escrow.”
Basic eligibility requirements to refinance your mortgage
Conventional loans allow for a loan-to-value (LTV) ratio up to 97%. This applies both to limited cash-out and no cash-out refinances. Your LTV ratio is calculated by dividing your loan amount by your home’s appraised value.
FHA loans, which are insured by the Federal Housing Administration, have a no cash-out refinance option. The maximum LTV ratio permitted is 97.75%.
You’ll need at least a 620 credit score when refinancing a conventional loan, and a 580 score for an FHA loan. Keep in mind the best interest rates are usually reserved for borrowers with a 740 score or higher.
Your debt-to-income ratio — the percentage of your gross monthly income used to make debt payments — shouldn’t exceed 45% for a conventional refinance and 43% for an FHA refinance. Your DTI ratio may go as high as 50%, but you’ll need to compensate by having a higher credit score or more cash reserves.
For more on how to qualify, see our guide on mortgage refinance requirements.
Which type of refinance is right for you?
Deciding between a limited cash-out and no cash-out refinance primarily depends on your answers to the following questions:
- Are you planning to pay your closing costs out of your own pocket, or finance them into your new mortgage?
- Is your goal to simply lower your mortgage rate, or are you looking to make other changes?
- Would you like to get some cash back from your refinance transaction?
- Do you meet your lender’s eligibility requirements for a refinance?
- Are you selling your home any time soon?
On that last point, if your intentions are to sell your home not long after refinancing your mortgage, it may not make sense to do any type of refinance. That’s because you may not reach your break-even point, which is the time it takes to recoup the costs you paid for your refinance — whether or not you roll those costs into your loan.
The bottom line
Limited cash-out and no cash-out refinances may have some overlap in their purposes, but the outcomes between the two vary somewhat.
If you’re more concerned about not paying closing costs and want to get a small amount of cash back to add to your rainy-day fund or replace an appliance, you might consider a limited cash-out refinance. But if you just want to get a better mortgage rate or more stable mortgage product, it may make sense to choose a no cash-out refinance.
Be sure to shop around with multiple mortgage lenders and make comparisons before moving forward.