Limited cash-out vs. no-cash-out refinance: Which one is right for you?

Refinancing allows you to swap out your current mortgage with a new one that has a lower interest rate, better terms, or both. If you don’t need to take out a large amount of cash at closing, a limited cash-out refinance or no-cash-out refinance are two possible options. Although these refinance options have different names, they operate in similar ways.

Here’s how both refinance options work, and some tips to help you decide which one is best for you.

• What is a limited cash-out refinance?
• What is a no-cash-out refinance?
• When does a limited cash-out refinance make sense?
• When does a no-cash-out refinance make sense?
• Limited cash-out refinance vs. no-cash-out refinance

What is a limited cash-out refinance?

A limited cash-out refinance allows you to swap out your current mortgage with a new, slightly larger mortgage that includes closing costs. This allows you to get a small amount of cash back at closing — 2% of your new loan balance or $2,000, whichever is less. Since the closing costs are rolled into the new loan, a limited cash-out refi is considered a type of no-closing-cost refi.

One of the primary differences between a limited cash-out refinance versus a no-cash-out refinance is that Fannie Mae sets the guidelines for limited cash-out refinances, whereas no-cash-out refinances use Freddie Mac’s rules. Aside from that, they work similarly.

It’s also important to note that when you don’t pay closing costs up front, this can increase your monthly mortgage payments. You’ll have a larger principal balance, and more interest to pay as a result.

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What is a no-cash-out refinance?

A no-cash-out refinance, sometimes referred to as a rate-and-term refinance, allows you to replace your home loan with one that offers a better rate and term. The new loan is typically the same amount as your current loan since you don’t withdraw any equity.

But similar to a limited cash-out refinance, you can receive a small amount of cash at closing if you have a certain type of mortgage loan. This means your new loan could be a few thousand dollars larger.

For example, if your loan is backed by Freddie Mac and you apply for a no-cash-out refinance, you can receive up to $2,000 or 1% of your new mortgage balance at closing, whichever is greater.

With a no-cash-out refinance, you can either roll your closing costs into your new loan or pay them up front to reduce your overall borrowing costs — similar to a limited cash-out refinance.

When does a limited cash-out refinance make sense?

A limited cash-out refinance could be the best option for you in the following scenarios:

• You don’t want to pay closing costs out of pocket. With a limited cash-out refinance, you can roll your closing costs into the new loan. Though this can increase the amount of interest you pay over the life of the loan, you wouldn’t have to tap your savings account.
• You want to buy mortgage points. You can finance mortgage points, also referred to as discount points, with a limited cash-out refi. Each point typically costs 1% of your loan amount and lowers your interest rate by a certain percentage that varies by lender. For example, if your new mortgage was $100,000, purchasing one point would cost you $1,000.
• You need a small amount of cash. You can receive up to $2,000 in cash at closing, which you can use to pay off high-interest debt or cover any small expense, like a home repair or medical bill.

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When does a no-cash-out refinance make sense?

A no-cash-out refinance might make more sense if any of the following apply to you:

• You only want a better rate or shorter loan term. With a no-cash-out refinance, you don't have to take out cash at closing. You can refinance just to save money by switching to a shorter loan term (if you can afford the higher payments) or securing a lower interest rate.
• You want to take care of closing costs up front. You have the option to pay for your closing costs up front instead of rolling them into your new loan. This can help you save money on interest over the life of the loan.
• You want more than $2,000 in cash. If you want to take more than $2,000 in cash out, it may be possible with a no-cash-out refinance. You can receive up to 1% of your new loan amount in cash if it's backed by Freddie Mac. This means if your new mortgage is $300,000, the maximum amount you can take out is $3,000.

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Limited cash-out refinance vs. no-cash-out refinance

If you want to take out a small amount of cash at closing, applying for either a limited cash-out or no-cash-out refinance could make sense.

But if you simply want to secure a lower rate or choose a better term without receiving cash back, a no-cash-out refinance would be the best option for you.

Here’s a look at some key differences between a limited cash-out and no-cash-out refinance:

Limited cash-out refinance

• Best if: You need a small amount of cash
• Cash-out amount: Up to 2% of new mortgage amount or $2,000 (whichever is less)
• Closing costs: Closing costs, points, and prepaid items can be rolled into your new mortgage

No-cash-out refinance

• Best if: You only want a better rate or shorter term
• Cash-out amount: Up to 1% of new mortgage amount or $2,000 (whichever is greater)
• Closing costs: Closing costs, points, and prepaid items can be rolled into your new loan or paid up front

If you need to take out a much larger amount of cash, a cash-out refinance can be a good option. Unlike a limited cash-out refinance or a no-cash-out refinance, there’s no standard limit. The amount of cash you can take out depends on how much equity you have in your home.