Limited Cash-Out vs. No Cash-Out Refinance: What’s the Difference?
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If you’re considering a mortgage refinance, a limited cash-out refinance and no cash-out refinance are two popular options that sound similar and may overlap in their purpose but have slightly different outcomes. A no cash-out refinance is a rate-and-term refi that leaves your equity intact, while a limited cash-out refinance replaces your mortgage with a slightly larger loan that includes your refinancing costs.
Deciding which one is right for you is a matter of understanding how each type of loan works, how they compare and how to qualify.
What is a no cash-out refinance?
A mortgage refinance is the process of borrowing a new mortgage with better terms to pay off your current mortgage. A no cash-out refinance is a type of mortgage refi in which you don’t receive any money after the closing process. 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, said Pava Leyrer, chief operating officer at Northern Mortgage Services in Grandville, Mich.
“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). You’re not trying to do anything but drop your rate,” 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.
What is a limited cash-out refinance?
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.
The cash you receive from a limited cash-out refinance doesn’t come from your available home equity, which differs from a standard cash-out refinance that allows you to pull equity out of your home. Instead, it can come from reconciling the variances between the estimated and actual loan payoff amounts, Leyrer said.
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, according to Fannie Mae limited cash-out refi guidelines.
“It’s extremely difficult to get right to the exact penny when you’re doing a refi,” Leyrer said. “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.”
Limited cash-out refinance costs
Remember, all of the costs to refinance 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
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 you end up owing a balance, the next steps depend on the borrower. Options include paying out of pocket to cover the difference, or having your lender increase your loan amount — if you have enough available equity.
No cash-out refinance vs. limited cash-out refinance
If you’re more concerned about getting a small amount of cash back to add to your rainy day fund or replace an appliance — plus not paying upfront closing costs — you might consider a limited cash-out refinance. But if you simply want a better mortgage rate or a more stable mortgage product, it may make sense to choose a no cash-out refinance.
Here’s a breakdown of how these two types of refinances stack up:
|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, doesn’t own it and doesn’t have the escrow,” Leyrer said.
Which type of refinance is right for you?
Deciding between a limited cash-out and no cash-out refinance may depend on how you answer 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 to your loan?
- Would you like 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 right after a mortgage refi, it may not make sense to do any type of refinance. That’s because you may not reach your break-even point, or the time it takes to recoup the costs you paid for your refinance — whether or not you roll those costs into your loan.
Basic eligibility requirements to refinance your mortgage
Conventional loans allow for a loan-to-value (LTV) ratio up to 97% on single-family homes. 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, include 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 refinance. The best mortgage rates are often reserved for borrowers with at least a 740 score, however.
Your debt-to-income (DTI) ratio — the percentage of your gross monthly income used to repay debt — 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.