Updated: Apr 4, 2021
A limited or NO CASH-OUT refinance is when you replace your existing mortgage with a new loan of the same amount. So if you owe another $50,000 on your house, the new home loan would be for the same amount of $50,000 but with a different interest rate. Depending on your reasons for refinancing[Link to WHY refinance post], you might swap a 15 year term loan for a 30 year term and reduce monthly payments. Or you might swap a 30 year term loan for a 15 year term and increase your monthly payment amount (in order to pay off the mortgage faster, for example.)
A CASH-OUT refinance is when you replace your existing mortgage with a new loan FOR MORE than you owe. So if you owe another $50,000 on your house, the new home loan could be for $100,000 and that additional $50,000 would go to you in cash. Another scenario: if your current home is “free and clear” (i.e. you completely paid off the mortgage), then you can take equity as a cash-out refinance.
A few things to keep in mind when thinking about cash-out refinancing:
Because of the higher amount, cash-out refinance would have a slightly higher interest rate. (However, it might be a lower interest rate if you bought your home during a period of seriously inflated mortgage rates.)
You can’t choose cash-out on a brand new mortgage. You must have built-up equity in order to qualify for the option. Meaning, you need to have made some mortgage payments already. BUT, if you paid for the property in cash, you can still do a cash-out refinance within 6 months of payment and get back what you paid from your own funds.
You can’t cash-out the equivalent of 100% of your home’s equity. In other words, if your home is valued at $300,000 and you’ve already paid $150,000. You can apply for a cash-out refinance of $200,000 or $250,000, but not for $300,000 because that’s the same as the home’s full price.
You will still pay closing costs[link to post] (which are typically 2% — 5% of the mortgage amount).
If you are only looking for a lower interest rate on your current monthly mortgage payments and you do not need the immediate cash, then regular refinancing makes more sense.
If you need the cash to pay for home renovations, to help consolidate your debt, or to otherwise improve your financial standing and credit score [Link to credit score post], then cash-out refinancing is the way to go. That being said, avoid spending the cash on things that won’t give you a return on your investment. A new car or trip to the Bahamas, for example, are not what your cash-out proceeds should go towards.