Limited Cash-Out vs. No Cash-Out Refinance: What’s the Difference?
If you’re considering a mortgage refinance, limited cash-out refinances and no cash-out refinances are two popular options that sound similar, but will affect your finances differently. A limited cash-out refinance allows you to add your refinancing costs to your new loan, while a no cash-out refinance pays just your current loan balance off, leaving more equity in your home.
Deciding which one is right for you depends on how each refinance option contributes to your short- and long-term financial goals.
What is a limited cash-out refinance?
A limited cash-out refinance replaces an existing mortgage with a new one, at a slightly higher loan amount. This option is popular with borrowers that want to add their refinancing 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 will need to 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 mortgage, including:
- The balance of your old mortgage
- 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
However, there are some limited cash-out refinance don’ts worth knowing:
- 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 loan amount
- You can’t complete the refinance if your home is currently listed for sale
What is a no cash-out refinance?
A no cash-out refinance is also a rate-and-term refinance option, except borrowers choose to pay off the balance of their current mortgage — and not a penny more. You opt not to receive any extra money, and the lower loan balance gives you a lower monthly payment than 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 to a fixed-rate mortgage without tapping any home equity that you’ve built up. Homeowners can pay closing costs with cash, a gift or a “no-closing-cost” option, which lets the lender pay 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 any of your costs.
When to choose a limited cash-out refinance vs. no cash-out refinance
The table below provides some insight into how each option can help you with your money management plans:
| Refinance option | Makes sense if: |
|---|---|
| Limited cash-out refinance |
|
| No cash-out refinance |
|
Requirements for limited and no cash-out refinance loan programs
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’ll have to document 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 debt-to-income (DTI) ratio is calculated by dividing your total debt by your income. Because you increase your loan amount with limited cash-out refinance, lenders need to make sure you can afford the new payment.
Your loan-to-value (LTV) ratio: A loan-to-value (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.
Below is a list of the most common requirements for the available limited and no cash-out refinance programs.
Limited cash-out refinance programs
| Refinance program | Maximum DTI ratio | Maximum LTV ratio | Minimum credit score |
|---|---|---|---|
| Conventional rate-and term | 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) | N/A No income verification | N/A No appraisal required | No guideline minimum |
No cash-out refinance programs
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) also offers a no cash-out refinance loan — called an FHA streamline — for homeowners with a current FHA loan. We’ve included the qualifying requirements for that program below.
| Refinance program | Maximum DTI ratio | Maximum LTV ratio | Minimum credit score | Assets required |
|---|---|---|---|---|
| Conventional no cash-out refinance | 50% | 97% | 620 | Most recent 30 days’ of bank statements showing enough funds to close |
| FHA streamline refinance | N/A (no income verification) | N/A (no appraisal required) | No guideline minimum | Most recent 30 days’ of bank statements showing enough funds to close |