A few years ago, when home values were soaring and the mortgage market crash and financial crisis had not yet caused widespread panic and financial difficulty, cash-out refinances were all the rage. Homeowners refinanced their homes for their (often-inflated) values, and then took out the difference in cash. The cash-out refinance was touted as a way to consolidate debt, as well as a way to pay for large expenses like weddings and vacations. Now, though, times have changed.
Instead of cashing out, some homeowners are instead using a cash-in refinance. This type of refinance is the complete opposite of a cash-out refinance; instead of taking money out, you pay money to reduce the principal while you refinance your home.
Photo via Wikimedia Commons.
Right now, the idea of refinancing is attractive to many homeowners. Mortgage interest rates are at record lows. However, some homeowners can’t take advantage of the rates because they don’t qualify for government programs that allow them to refinance, and their loan-to-value ratios are too high. In these cases, the ability to pay down the principal, and then refinance what’s left can be helpful.
Others might be interested in building a little more home equity in order to reduce monthly payments, and save on interest over time. Reducing the the principal can allow some borrowers the opportunity to reduce what they owe, as well as shorten the loan term in a manageable way, since the amount borrowed is lower (along with a lower interest rate).
With a cash-in refinance, you offer to pay a large amount toward the principal of the loan. You put money into your mortgage loan, rather than take it out. Now that the principal is reduced, the remaining balance is smaller. Your refinance is a lower amount, and you can use different terms: A lower rate, and a possibly lower term. A cash-in refinance can provide you with the opportunity to improve your cash flow, as well as save money over the long-term.
Of course, a cash-in refinance, like any other financial decision, requires careful thought. Before you complete a cash-in refinance, you need to consider whether or not it’s right for you. And, of course, you need to have a sizable chunk of capital at your disposal in order to reduce your principal at the time of refinance.
Consider how long you plan to stay in the house. If you are staying in your home for a short period of time, the money you put in might turn out to be lost to you, especially if your housing market is a ways from recovering. Additionally, your interest savings might not outweigh the loan fees you pay if you move before you can recoup the costs. Run the numbers to determine whether it makes sense from that standpoint. You want to make sure that you really are saving over time with your cash-in refinance.
Another consideration is liquidity. Once you put that money into the home, it’s locked up. Can you afford to lock up $10,000 to $15,000 just to save a little bit of money each month? As soon as you finish your cash-in refinance, that money is inaccessible to you unless you get a home equity loan or line of credit. In some cases, if you can get a refinance (check to see if you qualify for government programs) without putting the cash in, you will be able to save on interest, improve your cash flow, and keep your assets a little more liquid.
Those who can benefit the most from a cash-in refinance are likely those who don’t have a low enough loan-to-value (LTV) ratio to refinance. With tighter requirements, it can be difficult for those with a LTV higher than 80% to qualify. Another consideration is private mortgage insurance. If you have a LTV greater than 80%, you are probably paying private mortgage insurance. You can get rid of those PMI premiums by bringing your LTV to less than 80%. Your cash-in refinance qualifies you for the best terms, as well as helps you get rid of the mortgage insurance premiums. These advantages, especially if you can get a no-cost refinance, can save you money over time.
For the most part, a cash-in refinance operates similarly to a regular refinance. You need to have good credit, and you also need to go through the steps required of you to qualify for a mortgage. The main difference is that you use a sort of “down payment” as part of your refinance. When you ask for a refinance, which is essentially a replacement mortgage, you can choose to pay money toward the principle.
Before you do, though, consider the pros and cons. If you won’t qualify for a refinance without the cash-in, or if you want to get rid of your PMI, consider putting in only the minimum needed to accomplish your goals.
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