A no cash-out refinance loan assists buyers in lowering the interest rate and home payment when compared to the current loan. It also offers a way to consolidate secondary loans and liens into one payment, usually at a lower interest rate than the original loan. Even though the property may be worth more than the loan, a borrower accepts no cash as result of the refinancing in a no cash-out refinance.
No Cash-Out Loan Definition
A mortgage refinance pays the current lien and obtains a new loan based on current interest rates. The refinancing is typically done on a loan that is current, but the loan is also arranged when the borrower has failed to meet payment obligations and the loan is in arrears. The refinancing at the lower interest rate provides a payment that the borrow is able to play. No cash-out loans may also pay off junior liens, also known as secondary mortgages or line-of-credit loans, on the property.
Cost and Fees
No cash-out refinancing typically includes payment of the usual fees for the appraisal of the property, escrow charges, title insurance payments and loan origination fees. Lenders can incorporate any of these fees and costs into the loan so that the borrower has no upfront costs for the new loan.
Eligibility
The property used to secure a no cash-out loan must meet specific requirements. Banks prefer to loan on single-family properties in areas with a high number of residents with mortgages on the houses, rather than rental units. The borrower must also qualify for the loan. The loan-to-value ratio is the amount of the loan compared to what the property is worth. Banks and credit unions also set limits on borrowers based on income to loan payment ratios. Each bank makes a determination of the bottom line, but most banks use a 38- to 40-percent mortgage payment as a rule of thumb.
Seasoning
Seasoning is a term used in the loan industry to describe a loan that has been held for a number of years and is current, without any past due payments. New loans have specific requirements that must be met, including payment of an insurance policy on the loan. A seasoned loan is attractive to lenders offering refinancing since it shows that the borrower is responsible in paying bills. It traditionally also means that the property has some value (also called equity) after the borrower's earlier payments. No cash-out refinances usually do not require the borrower to carry an insurance policy for the lender.
Advantages
A no cash-out refinance loan assists homeowners in lowering the interest rate and payment compared to the current loan. It also offers a way to consolidate secondary loans and liens into one payment, usually at a lower interest rate. The lack of a seasoning period saves additional funds each month by eliminating the mortgage insurance payment. If the original loan is less than a year old, the refinancing may not require fees for a property appraisal.
References
- Freddie Mac: No Cash-out Refinance Mortgages
- "Become a Real Estate Agent," Pamela Gray and Jennifer James, 2007.
- Wells Fargo: Home Mortgage
Member Comments