Limited Cash Out vs. No Cash Out Refinance
Through refinancing, borrowers can exchange their current mortgage for a new one with more favorable terms, including a lower interest rate. Limited cash out vs no cash out refinance are two options to consider if you do not need to withdraw a sizable sum of money at closing. They may go by different names, but these refinancing choices accomplish the same goals.
What is Limited Cash Out Refinance?
In a limited cash-out refinance, the old mortgage is paid off and replaced with a new loan. This new loan could have better terms in terms of interest rate, repayment period, or both. According to Fannie Mae’s guidelines, the maximum cash-out amount for a limited cash-out refinance cannot exceed $2,000 or 2% of the new loan balance (whichever is less). On the other hand, depending on your home’s equity, a regular cash-out refinance can net you tens of thousands of dollars. Consequently, the size of your new loan will be significantly larger than that of your previous one.
What is No Cash Out Refinance?
A “no cash-out refinance” is a mortgage refinancing transaction in which the new loan amount is the same as, or less than, the current mortgage balance (plus any additional loan settlement costs). Refinancing a mortgage, in this case, is typically done to either reduce the interest rate on the loan or to modify other terms of the mortgage. Like a limited cash-out refinance, closing costs like points and pre-paid items can be added to the new loan, and the borrower can get some cash back (with some restrictions) from the deal. According to Freddie Mac’s guidelines, borrowers can receive a cash rebate of up to $2,000 or 1% (whichever is greater) of the loan amount when refinancing with no cash-out.
When to choose a Limited Cash Out Refinance vs No Cash Out Refinance?
Choosing the right type of refinancing is a crucial first step for most borrowers. Different scenarios determine which refinance option is better – limited cash out vs no cash out.
When to choose a Limited Cash-Out Refinance
- To avoid paying closing costs out of pocket: Your closing costs can be financed into your new loan if you opt for a limited cash-out refinance. The interest you pay on the loan may be higher in the long run, but you could avoid spending your savings.
- In need of a small amount of cash: Cash of $2,000 is available at closing and can be used for anything from paying off high-interest debt to covering unexpected costs like those associated with a home repair or improvement or a trip to the doctor.
- To avoid taking out a home equity loan: A home equity loan is a second mortgage that acts as a second lien on the property. However, a refinance results in a single loan and payment.
When to Choose a No-Cash-Out Refinance
- To lower your mortgage interest rate: Lenders can inform you if you are eligible for a lower interest rate and if you will save money on your monthly mortgage payment. You can save money through refinancing if you plan to stay in your home for at least the same time, as the loan’s interest savings will cover the closing costs.
- To reduce the loan length or switch loan programs: There are situations where switching from a 30-year loan to a shorter term could be beneficial financially (like a 20-year or a 15-year). In other words, if you’re getting ready to retire and want to pay off your home more aggressively, you might save a lot of money over the loan by taking out a mortgage with a shorter term and a lower interest rate. A no-cash-out refinance could be a good idea if that’s the case. There are other reasons you might switch from an FHA loan (which requires mortgage insurance) to a conventional loan.
- To increase your odds of approval: With a no-cash-out refinance, you won’t be taking out a ton of extra money, which could increase your chances of loan approval. First, you can get by with less home equity. Also, a home appraisal isn’t always necessary for refinancing. A cash-out refinance, on the other hand, results in a larger loan. In turn, this increases the lender’s exposure to risk, necessitating stricter requirements. Getting approved may be more challenging because you’ll likely need a home appraisal and a better-than-average credit score.
- To modify your loan terms by switching to a fixed rate: Refinancing before the introductory period ends allows you to change an adjustable-rate mortgage into a fixed-rate loan. When rates are low, this can be helpful if you want to lock in a low rate and have stable monthly payments.
Requirements for Limited Cash Out Refinance
A limited cash-out refinance typically has fewer stringent requirements than a standard cash-out refinance. Fannie Mae’s criteria for granting a streamlined refinance with limited cash-out are as follows:
Loan-to-value ratio (LTV): Building up some home equity before applying for a refinance loan is necessary. You may be unable to refinance your mortgage if you haven’t paid a significant portion of your current loan balance. A conventional loan will typically limit the loan amount to no more than 97% of the home’s appraised value. So, you can get a limited cash-out refinance without having to make huge payments on your mortgage.
Debt-to-income ratio (DTI): The ratio of your monthly pretax income to your minimum monthly debt payments is used by lenders to determine this number. The DTI factors in your monthly debt payments, including your mortgage, taxes, insurance, loans, and credit card balances. This ratio tells Fannie Mae whether a borrower can afford the new mortgage’s monthly payment. It should be up to 43%.
Credit score: Your ability to get a new loan and a better interest rate depend on your credit score. The minimum credit score required for refinancing is 620, but the higher, the better.
Requirements for No Cash-Out Refinance
The requirements for a no cash-out refinance are similar to those of a limited cash-out refinance: a minimum credit score of 620, a debt-to-income ratio of up to 43%, and a loan-to-value ratio of less than 97%, though it doesn’t come with the $2000 cash out.
Homeowners have a lot of options when it comes to refinancing their mortgage – no cash out vs limited cash out are one of them. If you’re looking to save money on your monthly payments, you might be considering limited cash out refinance. But what if you don’t need to withdraw any cash at all? In that case, a no cash out refinance might be the way to go. Limited cash out refinance can lower your interest rate and monthly payments, but you won’t be able to access the equity in your home. On the other hand, a no cash out refinance will allow you to keep your equity intact, but you might not get as good of a deal on your interest rate. Both options have their pros and cons, so it’s important to weigh your priorities before making a decision.