No-Cash-Out Refinance
Definition and meaning of No-Cash-Out Refinance in real estate.
A no-cash-out refinance is a mortgage transaction where a homeowner replaces their existing mortgage with a new one to secure a lower interest rate or a shorter loan term. Unlike a cash-out refinance, it does not allow the borrower to extract home equity, which is the market value of the home minus what is owed on it, as cash.
In more detail
This type of refinancing is primarily used to reduce monthly payments, pay off the loan faster, or switch from an adjustable-rate mortgage to a fixed-rate mortgage. The principal amount of the new loan is limited to the remaining balance of the first mortgage, plus closing costs, prepaids, which are upfront expenses like property taxes and insurance, and minor associated expenses.
The homeowner receives very little to no cash back at the closing table, which is typically capped by guidelines. Because the loan amount does not increase significantly, lenders view these transactions as lower risk than cash-out refinances.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Primary goals | Lower interest rates or shorter loan terms |
| Cash-back limit | Typically capped at one percent of loan amount |
| Lender risk level | Considered low risk compared to cash-out loans |
A homeowner refinances their mortgage to reduce their interest rate from six percent to four percent, rolling the closing costs into the new loan balance without taking any cash out.
Frequently asked questions
Can I include closing costs in a no-cash-out refinance?
Yes, lenders typically allow you to roll the closing costs and prepaid items into the new loan balance to avoid paying out-of-pocket.
How does this differ from a cash-out refinance?
A cash-out refinance allows you to borrow more than you owe and pocket the difference, whereas a no-cash-out refinance only covers existing debt.