What's the difference between a cash-out refinance and a no cash-out refinance? (2024)

What's the difference between a cash-out refinance and a no cash-out refinance?

When you use a cash-out refinance loan, you do not receive money to use for other purposes. A no cash-out refinance is a rate and term refinance because its main purpose is to change your interest rate and terms. A cash-out refinance provides homeowners who have equity with cash to use for other purposes.

What is the difference between cash out and no cash-out refinance?

In contrast to a no cash-out refinance, where the lender only refinances an equal to or lesser amount of the remaining loan balance, a cash-out refinance is when a person has equity in their home, and they choose to refinance a higher principal amount.

What's the catch with cash-out refinance?

Cons of cash-out refinance

Your interest rate might go up: You may qualify for the best rate around, but if interest rates have risen substantially since your original mortgage, odds are you'll pay more on your new loan. And since the new mortgage is bigger, you'll be charged more in interest too.

What is the downside of a cash-out refinance?

Taking out a larger mortgage to get cash out often means you'll have a higher monthly mortgage payment, even if you managed to secure a lower interest rate. Should you become unable to pay the loan on-time, the lender can put a lien on your home and potentially foreclose and take possession of the home.

What credit score is needed for cash-out refinance?

Most lenders require you to have a credit score of at least 580 to qualify for a refinance and 620 to take cash out. If your score is low, you may want to focus on improving it before you apply or explore ways to refinance with bad credit.

Does a cash-out refinance require closing costs?

Closing costs are one of the factors that determine the money you will get from a cash-out refinance. They are usually 3% to 5% of the new loan amount, and you have the option to pay them right away in cash or roll them into your new loan.

Do you lose equity in a cash-out refinance?

The bottom line. You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.

Do you pay taxes on cash-out refinance?

No, the proceeds from your cash-out refinance are not taxable. The money you receive from your cash-out refinance is essentially a loan you are taking out against your home's equity. Loan proceeds from a HELOC, home equity loan, cash-out refinance and other types of loans are not considered income.

Can you pull equity out of your home without refinancing?

Yes, you can take equity out of your home without refinancing your current mortgage by using a home equity loan or a home equity line of credit (HELOC). Both options allow you to borrow against the equity in your home, but they work a bit differently.

Does cash-out refinancing hurt your credit?

Cash-out refinances can have two adverse impacts on your credit score. One is the replacement of old debt with a new loan. Another is that the assumption of a larger loan balance could increase your credit utilization ratio. The credit utilization ratio makes up 30% of your FICO credit score.

Do I lose my interest rate if I refinance?

One of the primary benefits of refinancing is the ability to reduce your interest rate. A lower interest rate may mean lower mortgage payments each month. Plus, saving on interest means you end up paying less for your house overall and build equity in your home at a quicker rate.

Is it better to get a HELOC or cash-out refinance?

Compared to HELOCs, cash-out refinances are less risky for lenders, meaning they are often able to provide lower interest rates – though you may need to anticipate higher upfront fees in the form of closing costs.

How long does it take to get approved for a cash-out refinance?

If you ask a loan officer, they'll most likely say anywhere from 30 to 45 days. While this is generally true, there are plenty of instances where it can take much longer. Read below to understand the factors that affect approval times for a cash-out refinance.

What is the waiting period for a cash-out refinance?

Today, Fannie Mae updated its eligibility policy for cash-out refinance transactions to require that any existing first mortgage being paid off through the transaction be at least 12 months old as measured from the note date of the existing loan to the note date of the new loan.

How do you pay back a cash-out refinance?

A cash-out refinance is a type of mortgage refinance that allows you to take out a loan for more than you owe on your current mortgage. The lender hands you the difference in cash, minus closing costs. You pay back the new loan over time, usually between 15 and 30 years.

How much equity do I need to refinance with cash out?

You'll usually need at least 20% equity in your home to qualify for a cash-out refinance. In other words, you'll need to have paid off at least 20% of the current appraised value of the house.

Are mortgage rates going down in 2024?

Mortgage Rate Projection for 2024

As inflation slows and the Federal Reserve is able to start cutting the federal funds rate, mortgage rates are expected to trend down as well.

What does "no cash out refinance" mean?

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.

Who pays closing costs when refinancing?

When you refinance, you are required to pay closing costs like those you paid when you initially purchased your home. The average closing costs on a refinance are approximately $5,000, but the size of your loan and the state and county where you live will play big roles in how much you pay.

What is the cheapest way to get equity out of your house?

A home equity line of credit, or HELOC, is typically the most inexpensive way to tap into your home's equity.

What happens at a cash-out refinance closing?

One refinance option is a cash-out refinance, which allows homeowners to reduce their equity in return for cash and grants them better rates. After closing, the homeowner receives a check that they can use for anything from paying off debt to improving their home.

Why is cash out refi tax free?

Is the cash from a cash out refinance taxable? No, the cash you receive from a cash out refinance isn't taxed. That's because the IRS considers the money a loan you must pay back rather than income. There could even be tax benefits depending on how you use the money.

Does refinancing hurt your tax return?

Mortgage Interest and Itemizing Deductions

Keep in mind that if you refinance your mortgage, this may decrease your total tax deductions significantly. When you are able to refinance to a lower rate, you may pay less interest, meaning you will have less mortgage interest that can be deducted at tax time.

What is the maximum cash-out refinance on primary residence?

The LTV limit (known as the loan-to-value ratio limit) for a single-family property is 80%. That means you need to keep a minimum of 20% equity in your home when you do a cash-out refinance.

What is better, a refinance or an equity loan?

Refinancing can be a great way to get new mortgage rates and terms, as well as a one-time source of cash. If your current mortgage is satisfactory, home equity loans can be a less expensive option for consumers who need access to cash, while refinancing may be a way to lower monthly payments or save money on interest.