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    Why 40% of Homeowners Are Doing “Cash in” Refinances Wednesday, June 27th, 2012

    “Cash-in” refinances have become very popular recently and actually accounted for over 40% of all refinancing activity in the first half of the year according to Fannie Mae, the highest amount on record. If someone wants to refinance at today’s low rates lenders require you to have some equity, 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 by homeowners and can save lots of money, here is how.

    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 4 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 interest rates — as long as your loan balance is below a certain loan to value. Are you close to that cutoff and have plenty of cash to spare? Then bring enough funds to the table to push your mortgage balance below that threshold.

    2. Do you have a jumbo loan over $417k?  but are extremely close to the cutoff for a conforming loan (less than $417k)?.  Pay down the loan to under $417k  so you can get a much lower rate, as the average fixed rate on a 30-year jumbo is almost .5% higher than rates on a conforming loan.

    3. You can avoid mortgage insurance “PMI”. If your loan-to-value ratio is at a certain level that demands mortgage insurance. But you could avoid having to pay mortgage insurance by putting enough cash into the loan.

    4. 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.

    How a “Cash in” refinance works

    Let’s take a look at an example in the chart below. These are the figures from a loan we funded for a family last week. They had a $300k loan and they qualified for a 3.75% on a 30 year fixed, or 3.49% on a 20 year fixed, but the payments on the 20 year loan were  too high as they did not want their monthly payment to be over $1,600.

    So they paid down their loan balance by $25k from $300k to $275k, so they could afford the payments on the 20 year loan, as the new payment was $1,593 a month. *Over the life of the loan the 20 year loan will save them $92,730 in interest over the 30 year loan, all for putting in an investment of $25k. Most people would agree that $92,730 is a great return on an initial investment of $25k.

    There are several 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 your financial situation, please feel free to contact me directly at 858-442-2686 and I would be happy to help. I look forward to chatting soon.