Is a “Cash-in” Refinance in your Future?
While “cash-out” refinancing was extremely popular during the housing boom, allowing homeowners to pull equity from their homes, lower housing values have reduced the availability of those loans. Now, some homeowners are doing the reverse, taking money from their savings and investments to pay down their mortgage balance in order to qualify for the lowest interest rates on a new loan.
Freddie Mac recently estimated that 18% of all mortgage refinancing settlements were “cash-in” refinances during the first quarter of 2010. In the fourth quarter of 2009, 33% of all home refinancing included a cash payment by the borrowers.
Why bring cash to a home refinance
Homeowners choose to pay cash at the settlement for a variety of reasons, including:
1. Private mortgage insurance (PMI) is required on mortgage loans of more than 80% of the home value. Some borrowers are paying down the loan balance to avoid paying PMI and therefore reducing their monthly payments.
2. Paying down the balance to fit into a conventional loan. Jumbo loan rates, required in many areas on loans above $417,000 and in other areas for loans topping $729,750, are higher than conventional mortgage rates. If borrowers are close to the loan limit they can save substantially on their interest rates by reducing the amount they need to borrow.
3. Switching from a 30-year home loan to a 15-year mortgage, even when the interest is lower, will raise the monthly payments. Reducing the balance with cash may make the monthly payments more affordable.
4. The lowest rates for mortgage refinancing are available to borrowers with a credit score above 740 and 40% or more in equity. Reducing the mortgage balance may boost your ability to qualify for the best mortgage rates.
5. If you owe more on your current loan than the value of your home, bringing cash to the table may be required in order to qualify for refinancing your home.
Qualifying for a mortgage refinance depends on three main factors: the equity in your home, your debt-to-income ratio and your credit score. Mortgage lenders will also evaluate your history of savings, the availability of cash reserves and your employment history to see if those compensating factors can help you qualify for the lowest mortgage rates. If you have the cash available, especially if that cash is earning little interest, a cash-in refinance may be the best use for the money.
