No Cash-Out Refinance vs. Limited Cash-Out Refinance
If you’re considering a mortgage refinance, a no cash-out refinance and limited cash-out refinance are two popular options that sound similar, but will affect your finances differently. Deciding which one is right for you will depend on how each refinance option contributes to your short and long-term financial goals.
Key takeaways
- Both limited cash-out refinancing and no cash-out refinancing allow you to roll your refinancing costs into your new loan.
- No cash-out refinance and limited cash-out refinance are considered rate-and-term refinances, since their main purpose is to get more favorable loan terms.
- You can pocket up to $2,000 with a limited cash-out refinance.
What is a no cash-out refinance?
A no cash-out refinance allows borrowers to pay off their current mortgage balance — and typically not a penny more. You opt out of receiving any extra money, and the lower loan balance gives you a lower monthly payment than you’d have with a limited cash-out refinance.
The goal of a no cash-out refinance is usually to lock in a lower mortgage rate, shorten your loan term or move from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage without tapping any of the home equity you’ve built up. Homeowners can pay closing costs with cash, a gift or a “no-closing-cost” option, where the lender pays the refinance costs if the borrower accepts a higher interest rate.
It’s important to note that lenders permit you to roll your closing costs into your loan amount with a no cash-out refinance. However, you’ll end up with less equity and a higher monthly payment if you decide to finance these costs.
Cash-out vs. no cash-out refinance
The key difference between a cash-out refinance and a no cash-out refinance is that with a cash-out refinance, you replace your existing loan with a larger one, allowing you to convert some of your home equity to cash. In contrast, a no cash-out refinance focuses on improving your loan terms — like reducing your interest rate or shortening the loan term — without taking out any extra cash.
What is a limited cash-out refinance?
A limited cash-out refinance replaces an existing mortgage with a new one, typically at a slightly higher loan amount. This option is popular with borrowers who want to add their refinance closing costs to the new loan balance instead of paying them out of pocket. Although you avoid paying closing costs when the loan closes, the higher loan balance effectively spreads out the costs over the life of the loan.
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. Homeowners who want additional cash must apply for a regular cash-out refinance.
Costs you can roll into a limited cash-out refinance
All of your refinance closing costs can be rolled into the new loan, including:
- Your existing mortgage balance
- Lender fees, including origination costs, appraisal fees and credit report fees
- Title fees, recording fees and other closing costs
- A new escrow account to pay for your property taxes and insurance
- Prepaid interest on your new loan
That said, limited cash-out refinancing has some drawbacks to consider:
- You can’t pay off a second loan like a home equity loan or home equity line of credit (HELOC) unless it was used to purchase the home
- You can’t include property taxes that are more than 60 days delinquent in the new loan amount
- You can’t complete the refinance if your home is currently listed for sale
Ready to compare refinance offers? Get Your Best Rates from Top Lenders TodayWhen to choose a no cash-out vs. limited cash-out refinance
The table below provides insight into how each type of refinance can impact your financial situation:
| Refinance option | Makes sense if: |
|---|---|
| No cash-out refinance |
|
| Limited cash-out refinance |
|
Requirements for no cash-out and limited cash-out refinance loan programs
No cash-out refinance programs
| Refinance program | Maximum DTI ratio | Maximum LTV ratio | Minimum credit score | Assets required |
|---|---|---|---|---|
| Conventional no cash-out refinance | 45% to 50% | 97% | 620 | Most recent 30 days’ of bank statements showing enough funds to close |
| FHA streamline refinance | No income verification | No appraisal required | No guideline minimum | Most recent 30 days’ of bank statements showing enough funds to close |
Limited cash-out refinance programs
| Refinance program | Maximum DTI ratio | Maximum LTV ratio | Minimum credit score |
|---|---|---|---|
| Conventional rate-and term | 45% to 50% | 97% | 620 |
| FHA rate-and-term | 43% | 97.75% | 580 |
| VA rate-and-term | 41% | 100% | No guideline minimum |
| VA interest rate reduction refinance loan (IRRRL) | No maximum DTI | No appraisal required | No guideline minimum |
| USDA streamline refinance | No maximum DTI | No appraisal required | No guideline minimum |
If you choose a no cash-out refinance, the lender needs to document how you’ll pay the closing costs. The Federal Housing Administration (FHA) offers a no cash-out refinance loan — called an FHA streamline refinance — for homeowners with a current FHA loan. We’ve included the qualifying requirements for that program above.
Qualifying for a limited or no cash-out refinance is easier than getting a cash-out refinance. In some cases, you’ll need little to no equity, and you may not even need to verify your income or home’s value for some government-backed streamline refinance programs. However, you will have to document that you have enough assets to pay your costs on any no cash-out refinance program, unless you choose a no-closing-cost option.
Lenders are primarily concerned with the following when approving you for a limited cash-out refinance:
- Your maximum debt-to-income (DTI) ratio: Your DTI ratio is calculated by dividing your total monthly debt by your monthly gross income. Because you increase your loan amount with a limited cash-out refinance, lenders need to make sure you can afford the new payment.
- Your loan-to-value (LTV) ratio: An LTV ratio measures how much of your home’s value you borrow. In order to add cash to your loan balance for a limited cash-out refinance, lenders have to verify your home’s value to make sure you have enough equity to roll your closing costs into your loan amount.