Cash-out refinance vs. no-cash-out refinance

For many borrowers, there’s not much competition between a cash-out or no-cash-out refinance.

If you want to withdraw cash from your home equity, you’ll use a cash-out refinance (provided you’re eligible). This gives you a lump sum of cash at closing that can be used for any purpose.

But if you just want to refinance for a lower interest rate, you’ll use a no-cash-out or ‘rate-and-term’ refinance. This can lower your monthly mortgage payments and save you a lot of money in the long run.

In this article (Skip to…)

• Key takeaways
• No-cash-out refinance
• Cash-out refinance
• Maximum cash-back
• Should you cash-out?
• Refinance FAQ
• Today’s refinance rates

A no-cash-out refinance is also called a rate-and-term refinance.

In other words, your goal is to get a lower mortgage rate, change the “term” (duration) of your loan, or both. Each of those will reduce your monthly payments, providing you don’t refinance to a much shorter term.

Any refinance means replacing your existing mortgage with a new one. With a rate-and-term refi, your new loan amount will be the same as your existing mortgage balance.

Closing costs

You may have to pay refinance closing costs out of pocket. And those can be roughly 2-5% of your loan amount.

However, you may be offered a no-closing-cost refinance. This can help you lower your rate and monthly mortgage payment without paying any upfront fees.

Just realize that no-closing-cost loans typically come with a higher mortgage rate. So you’ll pay those costs in the end. Of course, there’s nothing wrong with that, as long as you recognize what’s happening and are cool with it.

Streamline refinances

Many types of mortgages allow Streamline refinancing. A Streamline Refinance typically reduces the time, closing costs, and paperwork involved with a rate-and-term refinance. However, you can never take cash-out with a Streamline Refi.

Streamline Refinance options are available for FHA loans, VA loans, and USDA loans.

For those with conventional mortgages backed by Fannie Mae or Freddie Mac, there are new loan programs that can reduce the cost of refinancing and guarantee a lower rate. However, you’ll need a low or moderate income to qualify.

A cash-out refinance also replaces your existing mortgage loan with a new one. But, unlike a no-cash-out refi, your new loan balance will be bigger than what you currently owe. That ‘extra’ loan amount is returned to you as cash-back at closing.

What you’re doing is using home equity as collateral to secure your cash-out loan. And that allows you to borrow money at a low interest rate. This can be a much more affordable way to get a large sum of cash than using, say, credit cards or personal loans.

Benefits of cash-out refinancing

A cash-out refinance can be a low-cost way to borrow a large amount of money. Many homeowners use a cash-out refinance to fund large expenses that will ultimately increase their net worth.

For example, some of the best uses for a cash-out refinance include:

• Paying for home improvements or renovations
• Paying for higher education or a new startup business
• Consolidating high-interest debt
• Covering large, unexpected medical bills
• Buying a second home or investment property

Meanwhile, think carefully before using a cash-out refinance to fund a big event: a wedding, perhaps, or an anniversary party or once-in-a-lifetime vacation. Assuming you opt for a new 30-year mortgage, you’ll be paying for that treat — plus interest — for the next three decades.

Drawbacks of cash-out refinancing

When it comes to a cash-out refinance vs. no-cash-out refinance, cashing out has some drawbacks.

To start with, you’ll likely have to pay a higher mortgage rate than if you didn’t want cash. And the difference is often 0.125-0.25% higher.

In other words, if you could get a mortgage rate of 3.3% for a rate-and-term refinance, you’d likely pay between 3.425% and 3.55% to get cash out.

Your exact rate will depend on the lender you choose, your financial circumstances, and the amount of cash you’re taking from your home equity. You can use our mortgage refinance calculator to work out what that means for you in dollars and cents.

And, of course, you must remember that you’ll be paying that higher rate on a higher balance. Because, if you weren’t taking cash out, you’d be borrowing less. 

Finally, you should be aware that most lenders have higher eligibility criteria for cash-out refinances than rate-and-term ones.

You’re more likely to be approved if you have a higher credit score and lower monthly payments on other existing debts than you’d need for a rate-and-term refinance.

1. Home equity loan (HEL) — You keep your existing mortgage and take out a second mortgage with a shorter term, often 5-15 years. You pay both mortgages in parallel. And you typically repay the HEL in equal, fixed installments
2. Home equity line of credit — A bit like a hybrid home equity loan and credit card. You can borrow up to your limit, repay, and re-borrow as often as you want. And you pay interest (typically variable) only on your current balance. Usually has lower upfront costs than HELs and refinances
3. Personal loan — Not a second mortgage and therefore unsecured. So expect to pay an appreciably higher rate unless your credit score is stellar and your finances exceptionally stable. Low or zero setup fees

Whether one of those will suit you better than a cash-out refinance will depend on your personal goals, needs, and circumstances. But you should definitely check them out.

Verify your new rate (Nov 23rd, 2021)