Cash-In Refinancing on the Rise: What's in It for You?
A cash-in refinance, or paying down the principal of a loan, is when a homeowner brings a check to closing and gets a new mortgage for a smaller amount. Last year, this type of refinancing climbed. In the last three months of 2009, the cash-in refi accounted for one-third of Freddie Mac-owned loans.
To find out the advantages of a cash-in refinancing, HousingWatch talked to some real estate experts for tips on why this might be the route some homeowners should take....
1) Moving to the lower interest rate of a conventional loan
Many mortgage brokers agree that a cash-in refinance is typically for a homeowner who has a fixed-income or who has additional money to contribute to their loan amount.
For these candidates, one of the biggest benefits might be paying off enough of their mortgage to move from the interest rate of a jumbo loan to a conventional rate. A jumbo loan, a type of mortgage required on larger loans that tend to have higher interest rates, currently carries an interest rate of 5.75 percent, while interest rates of fixed-loans are hovering around 1 percent lower.
In many areas a jumbo loan is more than than $417,000 (in higher cost areas, it is $729,750, but this amount varies by region). If finances allow, it's prudent for a homeowner with a mortgage of $500,000 to reduce their loan amount to the $417,000 marker and qualify for a lower interest rate, according to Joe Caltabiano, a senior vice president at Guaranteed Rate, a Chicago-based brokerage company.
With an improving economy and historically-low interest rates, Caltabiano adds that more are gaining the confidence to pay down their loans, which he says makes the most sense when people have uninvested money sitting in a low-yield checking or savings account.
2) Avoiding PMI costs
Private mortgage insurance, better known by the acronym PMI, is an insurance payment required by lenders when homeowners have less than 20 percent equity in their home. Homeowners, who increase the equity in their home during a refinance, can eliminate these monthly mandated fees, and in turn, they save money by putting it towards their principle.
Kirk Tatom, president and owner of Tatom Lending LLC in Dallas, Texas, estimates that homeowners with a $200,000 loan have yearly PMI costs of around $1,600 a year -- a substantial amount of money that helps lower the overall loan balance.
"You don't have to be a brainiac to know you can bring $2,000 to the table and save $2,000 a year," he says.
3) Streamline the refinancing process
Falling home prices may also be causing a surge of cash-in refinances with a number of homeowners forking over extra dollars to make sure their refinancing happens -- easily.
If your $200,000 house is appraised by the lender for $150,000, to maintain 20 percent equity a refinanced loan cannot be more than $120,000, or 80 percent of the home's current value of $150,000.
If the homeowner owes more than $120,000, they'll have to cover the difference or pay for PMI.
"Just to make the deal work you may have to bring some money to the table," says Tatom. "It's cash-in refinance for a lot of people or you can't refinance."
Under the recently implemented Mortgage Disclosure Improvement Act, brokers say it now takes 10 business days to change the amount of a loan. During this time, differences in appraised values, accruing interest, and other fees can affect the daily balance of the loan, and this could mean that you owe more (or less) when it's time to sign your new loan agreement.
For convenience and to secure an interest rate, which by regulation can only be locked in for 30 days, Tatom says some of his clients are just coughing up the money to move to the lower interest plan sooner and to start saving money.
Yet other brokers don't see it that way. They believe the move to cash-in refinances signals a changed mentality among American homeowners.
"People have treated the home as a way to make money instead of a place to stash savings," says Natasha Lovas, a senior mortgage broker for Guarantee Mortgage out of San Francisco. "They're looking at it differently now. Your house is your nest egg. It is to be paid down and built up."