Cash out vs. no cash out refinances

Learn the differences between them!

There are two main types of home refinances. Cash out refinances, which allow you to get cash from the value of your home’s equity, and no cash out refinances which allow you to change the interest rate and terms of your current mortgage without taking cash from your equity.

What does a cash out refinance do?

A cash out refinance helps you borrow money from your home’s equity. For example, you might be able to refinance a mortgage for $200,000 to a new mortgage for $250,000 and get $50,000 in cash.

The primary benefit of cash out refinances is they give you cash for expenses like home renovations, college tuition, or debt consolidation. Cash out refinances increase the principal balance of your mortgage. They often increase the amount of your monthly payments and the amount of interest you pay over the life of the loan.

A cash out refinance lets you change your interest rate and terms just like a no cash out refinance. For example, if you have 25 years left on your current mortgage, a cash out refinance can allow you to get cash and increase your mortgage’s term to 30 years.

What is a no cash out refinance?

A no cash out refinance is also called a rate and term refinance or simply a mortgage refinance. You replace your current mortgage with a new mortgage that has a better rate or better terms. Homeowners most often choose a no cash out refinance when they can get a new interest rate that is significantly lower than the rate on their current mortgage.

The primary benefit of no cash out refinances is they can help you lower your monthly payment or save money on interest over the life of the loan. No cash out refinances do not increase the principal balance of your mortgage. They generally do not increase the amount of interest you pay over the life of the loan. And they don’t typically increase your monthly payment either, unless you choose to significantly reduce the number of years left on your mortgage.

For example, if you have 25 years left on your mortgage and you decide to reduce your mortgage’s term to 15 years, this choice might increase your minimum monthly payments. However, a higher monthly payment in this case can help you pay off your mortgage sooner and save more money in interest.

What is a limited cash out refinance?

A limited cash out refinance is similar to a no cash out refinance. The primary difference is that a limited cash out refinance allows you to add your closing costs to your principal balance rather than paying them at closing. For example, if you are refinancing a $200,000 mortgage and the refinance has $5,000 in closing costs, you might be able to add these costs to your new mortgage and make your principal balance $205,000.

In this case, the refinance does increase your mortgage balance and you will pay interest on your closing costs. When you significantly reduce your rate however, the savings in interest payments over the life of the loan typically make a limited cash out refinance worthwhile.

Fannie Mae rules also allow homeowners to take out a limited amount of cash when they refinance. Current rules for 2022 limit the amount to either 2% of the refinance loan amount or $2,000, whichever is less.

Last reviewed and updated June 2023 by Freedom Mortgage Corporation.