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Cash Out vs. No Cash Out Refinance: What’s the Difference?

Explore Pros and Cons of Cash Out and No Cash Out Refis

If you're a homeowner, you may have heard about cash out refinances and no cash out refinances. Both of these options allow you to refinance your home, but there are different purposes, pros, and cons to each process.

A cash out refinance involves getting a new mortgage for a larger amount than your current loan. You walk away with the cash at closing, while changing the repayment timeline and terms of your existing mortgage at the same time.

A no-cash-out refinance also involves getting a new loan and changing the terms of your existing mortgage, but your new loan just repays what you owe without taking extra cash out of your home. It's also called a rate-and-term refinance.

This guide will explain both of these loan options, the differences between them, and how to decide which is right for you.

Cash Out vs. No Cash Out Refi Overview

The table below shows some of the key differences between these refinance options, including the maximum loan to value, the tax implications, and other key features.

Feature	Cash Out Refinance	No Cash Out Refinance
Primary Goal	Access your home equity	Change the rates and terms of your current mortgage
How It Works	Borrow enough to pay off your mortgage and walk away with a lump sum	Borrow enough to pay off your current loan only
Key Benefit	Access to equity to accomplish important financial goals	Potential to reduce your interest rate, switch from a variable to a fixed-rate loan, or otherwise get more favorable loan terms
Closing Costs	2% to 6% of your loan value	2% to 6% of your loan value
Interest Rates	Varies by lender; may be higher than a no cash out refinance since you're increasing your loan balance	Varies by lender and market rate
Maximum LTV	Usually 80%	Usually 80%
Tax Implications	Loan interest is tax-deductible on loans up to $750,000 if you itemize	Loan interest is tax-deductible on loans up to $750,000 if you itemize

What Is a Cash Out Refinance?

A cash-out refinance allows you to access cash from your home's equity. Equity is the difference between what your home is worth in the current market and the remainder of the balance you have left to pay on it. You can borrow the difference and finance it into your mortgage.

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 back at closing, depending on the equity you have in your home.

The primary benefit of cash out refinances is the cash you receive, which can be used for expenses like home renovations, college tuition, or debt consolidation. Cash out refinances increase the principal balance of your mortgage. They also usually increase the amount of your monthly payments and how much interest you'll 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 term to 30 years.

Cash Out Refi Pros and Cons

To decide if a cash out refinance is right for you, it's important to consider the pros and cons.

Pros

Access to large amounts of cash at a lower interest rate: A cash out refinance loan can be an affordable way to borrow. The interest rates are usually lower than on other types of debt, such as a personal loan, credit card, home equity loan, or home equity line of credit.
You may be able to improve the terms of your current mortgage: If you can get a new loan at a lower rate than your current mortgage, you can reduce your borrowing costs on your current home loan.
Flexibility in what you use the cash for: You can use the money you get from the cash-out refinance for just about anything, including home improvements and debt consolidation.
You can keep a single monthly payment: Since you are refinancing your current mortgage instead of taking an additional loan, you'll still have only one monthly payment to make.
Tax benefits: The interest on your loan can be deductible on up to $750,000 in total mortgage debt if you itemize when you file your taxes.

Cons

You'll increase your total debt: Since you'll be borrowing more against your home equity, you'll have a larger loan. Increasing your total debt reduces your net worth and results in larger monthly payments and higher borrowing costs over time.
You'll reduce the equity in your home: When you tap into equity, you owe a larger percentage of what your home is worth. You increase the risk of ending up underwater on your home loan or owing more than it is worth.
Closing costs can be high: The closing costs on a cash out refinance loan can be as much as 2% to 6% of the value of the loan.
Your interest rate may be higher: If you took out your mortgage at a time when rates were lower than they currently are, you could raise the rate on your current home loan and make payoff more expensive.
You'll take longer to pay off your loan: When you take out a cash out refinance loan, you may extend the time left to pay on your home loan. If you had 25 years left on your mortgage and took out a new 30-year loan, you'd add five years to your payoff time.
You put your home at risk: Since you are increasing your loan balance and using your home as collateral, you risk foreclosure if you can't make your payments.

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'll replace your current mortgage with a new mortgage that has different terms. Usually, the goal is to qualify for a lower rate or better terms.

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, especially if you qualify for a much lower interest rate.

The primary benefit of no cash out refinances is that you can reduce your monthly payment or save money on interest over the life of the loan. That's because this type of refinance doesn't increase your principal balance, and, unless you reduce your loan term, a rate-and-term refinance won't increase your monthly payment.

No Cash Out Refi Pros and Cons

If you are considering a no cash out refinance, here are the pros and cons you need to think about to help you decide.

Pros

You may be able to reduce the interest rate on your home loan: If you can qualify for a no cash out refinance loan at a lower rate than you are currently paying, you can reduce the cost of financing your home.
You can change your loan term: You could choose to make your loan term shorter to reduce your payoff costs over time by reducing the time you pay interest. Many short-term loans also have lower rates. Or, you could make your term longer to reduce your monthly payments, although this could cost you more over time.
You avoid taking on more debt: When you do a no cash out refi, you do not increase your debt balance. Your total debt levels remain the same, so you don't reduce your net worth.
You may qualify for a lower interest rate and closing costs: Because your loan balance is lower, you may qualify for a lower interest rate and lower closing costs than with a cash out refinance loan.

Cons

You won't get access to cash: You will not walk away from the transaction with any extra money.
You'll have closing costs to pay: Although your closing costs will be lower than with a cash out refinance loan since your loan balance is lower, you still have closing costs equal to around 2% to 6% of the loan balance. You will either need to pay these up front or roll them into the loan balance, which will either increase your principal balance or raise your interest rate, either of which causes you to pay more over the life of the loan.

How to Choose Between a Cash Out and No Cash Out Refinance

Besides considering the pros, cons, and differences between a cash out refinance and a no cash out refinance, evaluating the factors below can also help you decide what's best.

How it could help: A no cash out refinance could allow you to lower your interest rate and change your loan term, potentially saving you money over time without affecting your home equity. A cash out refinance could do the same, while also granting access to cash you may need for other important goals.
How much it costs: Both a cash out refinance and a no cash out refinance come with closing costs that must be paid up front or rolled into your loan, resulting in either a higher balance or higher interest rate. However, because a cash-out refinance loan has a higher balance, closing costs are higher. You will also increase your payments with a cash-out refinance loan because you're borrowing more money. Use a cash out refinance calculator to understand total costs so you can make sure the new payments are affordable over time.
How it affects repayment: Both a cash out refinance loan and a no cash out refinance loan could affect your repayment timeline. Shortening your loan term could become much more expensive with a cash out refi, though, because you are borrowing more and paying off the loan in less time.

Final Thoughts: How Cash Out and No Cash Out Refis Compare

Cash-out refinance loans and no-cash-out refinance loans both make sense in the right circumstances, especially if you can qualify for a new loan at an affordable rate. Explore your options for a cash-out refinance loan and reach out to a mortgage loan professional today to see what loan offers are available to you.