No Cash Out Refinance vs. Limited Cash Out Refinance: What You Need to Know Before Getting Started

If you’re thinking about refinancing your mortgage, then perhaps you’ve scoured the internet for information, only to find there are a lot more options to choose from than you thought. There's no cash out, limited cash out, and even cash out refinances.

Luckily, all refinance processes are similar: In each case, you’ll replace your current mortgage with a brand new one. The “cash out” portion of the terms simply references whether you will take any additional money out when refinancing.

With a cash out refinance, for instance, you can withdraw an additional sum of money, which is based on a portion of your home equity. The amount you can tap into can be several thousand dollars to tens of thousands, and you can use that money any way you’d like. The extra balance will be applied to your loan amount, meaning you’ll owe more. You can learn more about cash out refinancing here.

Here are the differences between the two and how to determine which one’s right for you.

What is a no cash out refinance?

A no cash out refinance is often referred to as a “rate-and-term” refinance. This option is typically used to secure a better interest rate (how much you pay your lender for the loan) or different loan terms (the length of your mortgage or how your repayment is structured).

In this scenario, all proceeds from the refinance are used to pay off the existing mortgage and open a new one for the same property. As the name implies, you would not receive any cash when you close, so your new mortgage balance should be about the same as your current loan amount.

Typically, no cash out refinances are a good option if you can qualify for a better interest rate than when you first took out your mortgage, perhaps due to a better credit score. Or when overall mortgage rates have decreased due to economic or market factors. Refinancing to a lower interest rate can help you save significantly in your monthly payments as well as over time.

In addition to your interest rate, you also have the opportunity to change your loan term, for instance, if you have a 30-year mortgage and would like to switch to a 15-year. In this scenario, your monthly payment will likely increase because you’ll have less time to pay off your loan. But the major benefit is you’ll pay off your balance quicker, meaning you’ll pay less in interest overall.

You could also change the type of mortgage you have from an adjustable-rate mortgage to a fixed-rate for more predictable monthly payments.

When you refinance — no matter which type you choose — you’ll typically be responsible for paying for closing costs, which could amount to a thousands of dollars. With a no cash out refi, you can pay these costs when you close on the mortgage or roll them into your new loan.

No cash out refinance requirements

Just like when you first got your mortgage, you'll have to meet certain qualifications to be approved for a no cash out refinance. Here are the typical requirements, though they may vary by lender:

• Credit score: minimum of 620
• Debt-to-income ratio: Up to 43%
• Loan-to-value ratio: Less than 97%
• Waiting period: 12 months, and you must show that you’ve never missed a payment within those 12 months

What is a limited cash out refinance?

In many ways, a limited cash out refinance is similar to a no cash out refinance.

You can typically use it for the same purposes, such as reducing your interest rate or changing the terms of your loan. However, as the name suggests, a limited cash out refinance also allows you to take out a limited amount of money, up to $2,000. In this case, the extra money is added to your new loan balance.

You may then use that money to pay for your closing costs, so you don’t have to reach into your wallet to cover them.

Limited cash out requirements

Because a limited cash out refinance is similar to a no cash out refinance, their qualifying requirements are alike, as well. Please note these vary by lender.

Here's what you need to know before apply for limited cash out refinance:

• Credit score: At least 620
• Debt-to-income ratio: Up to 43%
• Loan-to-value ratio: Less than 97%
• Waiting period: 12 months, and you must show that you’ve never missed a payment within those 12 months
• Maximum cash out: $2,000

No cash out refinance vs. limited cash out refinance: How do they compare?

The key difference between the two loan types is whether you take cash out after closing. This variation will determine whether your loan amount will increase after you refinance your mortgage.

When to choose a no cash out refi:

• You want to change your mortgage rate or loan term.
• You want to switch from an adjustable-rate mortgage to a fixed-rate.
• You don’t want your mortgage balance to increase.
• You don’t want to take any cash out.

When to choose a limited cash out refi:

• You want to change your mortgage rate or loan term.
• You want to switch from an adjustable-rate mortgage to a fixed-rate.
• You don’t mind if your mortgage balance increases slightly.
• You want access to a little extra cash when you close.

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Why refinance with Better Mortgage

Whether you choose a no cash out or a limited cash out refinance, saving on your closing costs will help you avoid extra expenses, whether they’re out-of-pocket or throughout the life of your loan. So make sure you select a lender that doesn’t impose unnecessary fees, which could save you hundreds to thousands of dollars.

At Better Mortgage, we never charge lender fees, like application fees, origination fees, or underwriting fees. Our loan officers never get paid commission, which means they’ll work to find you the best loan, not the biggest one. Here’s what you can expect when you refinance with us:

• Get pre-approved in as little as 3 minutes. Just answer a few quick questions to find out if you’re pre-approved.
• Our entire loan process is completed online, so you can upload documents and track your application’s progress anytime, anywhere.
• Our 100% online application process can shave days to weeks off the transaction, allowing you to close on your loan faster.

Ready to see how a cash out refinance can help you reach your goals? Get pre-approved today.

Better Mortgage Corporation. NMLS #330511