Why 33% of Homeowners Are Doing “Cash In” Refinances
“Cash-in” refinances have become very popular recently and actually accounted for 33% of all refinancing activity in the third quarter according to Freddie Mac, the highest amount on record. If someone wants to refinance at today’s low rates? Well, lenders want you to have equity of at least 20%; if you don’t, you must add “cash in” to make up the difference. “Cash-in” refinances are now being used as a great investment tool and can save a ton of money, here is how.
At the height of the housing boom, millions of Americans treated their houses like ATMs, pulling out money through “cash-out” refinances. Today, with millions of mortgages underwater, money is flowing in the opposite direction. As there are very few investments out there these days that are paying a decent rate of return, “cash in” refinancing can represent a great opportunity to allow your money to work better for you and save additional money each month on interest and mortgage payments.
Here are 3 examples when a “cash in” refinance pays off, these can also work the exact same way on a purchase loan too if buyers are looking to save extra money on their loan.
When to put cash into your refinance
1. You can lower your mortgage rate significantly: You know that you can qualify for the rock-bottom rates that we have had recently –between roughly 4.25%-4.5% on a 30-year fixed loan — as long as your loan-to-value ratio is below 80%. Are you close to that cutoff and have plenty of cash to spare? Then bring enough to the table to push you below that threshold.
Have a jumbo loan but are extremely close to the cutoff for a conforming loan ($417,000 for single-family homes in most markets)? Then toss in enough extra money to get out of jumbo land when you refinance. The average fixed rate on a 30-year jumbo is about 4.5%- 4.75%; rates on a conforming loan are usually .25% lower.
2. You can avoid PMI: If your loan-to-value ratio is above 80%, you have to shell out for private mortgage insurance, which averages $1,500 a year on a $300,000 loan. But you could avoid having to pay PMI by putting enough cash in so that your LTV ratio falls below 80%.
3. You want to pay off your mortgage faster: Some homeowners are putting cash in so that they can afford the payments when they refinance a 30-year loan into a 20, 15, or even a 10-year mortgage, Even with the extra cash, your monthly payments will be higher on a shorter loan. But over the life of the mortgage, the total interest savings can be huge.
Lets take a look at an example in the chart below. Say a homeowner wants to refinance his home. He has a $200k loan and can get 4.4% on a 30 year fixed, or 3.9% on a 15 year fixed, but the payments on the 15 year loan are just a little too high. But if he puts $25k into the 15 year loan he can now afford the payments on the 15 year loan. Over the life of the loan the 15 year loan will save him $115,100 versus the 30 year loan, all for putting in an investment of $25k. This works out to be a great return on the initial investment of $25k.
When to hold onto your money
There are situations where doing a “cash in” refinance will not make sense, where it will be better to hold onto your money and savings. Here are 3 examples.
1. You plan to be in your home for less than five years: At today’s rates it will probably take you a couple of years of lower payments in a conventional refinance to recoup your closing costs. But cash-in refinances can often take more than twice that long to break even. So unless you plan on staying put for a while, don’t put in the extra money.
2. Your credit score isn’t so great: Say your current mortgage is at 5.5%, but you want to take advantage of today’s much lower rates. If your credit score is low, there’s a good chance you won’t qualify for a sub-5% rate on a 30-year fixed mortgage. In fact, homeowners with scores below 680 probably won’t get a low enough rate when they refinance to make a cash-in refinance pay off.
3. You’re strapped for cash: If you have to tap into your 6 month emergency fund to orchestrate a refinance, a cash in refinance loan will not make sense. The risk is too great that you’ll lack liquidity should an emergency situation arise.
Waiting to refinance and Falling values
With mortgage rates at all time record lows, of course this will be the main reason that people would want to refinance right now. But there is another reason that people should look into refinancing soon if they can qualify. Unfortunately there may be some areas that might experience another dip in housing values in the near future, which means some people who can qualify today for a refinance may not qualify if we do have another dip in values.
Here is an example. Let’s say a homeowner is at 80% loan to value today on their loan, but does not want to refinance yet because they are waiting for rates to drop even lower. Well let’s say over the next few months values do dip again or a foreclosure sells in their neighborhood, this same homeowner who was at 80% loan to value, will now be at 85% loan to value based on the new appraised value. This means the new loan will now come with MI and a much higher payment, and there is a chance they may not even qualify for the loan anymore either.
As you can see above, there are many different ways to determine if a “cash in” refinance makes sense. If you or anyone else you know needs help going over any of the examples above to determine if a “cash in” refinance would benefit a particular situation, please feel free to contact me directly at 858-200-9602 and I would be happy to help. I look forward to chatting soon.
This entry was posted on Tuesday, November 2nd, 2010 at 11:50 pm and is filed under Why 33% of Homeowners Are Doing “Cash In” Refinances. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.