Time to Consider a Cash-in Refinance?

Kara  Johnson
Written by
Kara Johnson
Read Time: 3 minutes

Here's something you may not have considered if you're looking to refinance your mortgage - a cash-in refinance.

A cash-in refinance is exactly what it sounds like. Instead of borrowing against your home equity as you would in a cash-out refinance, you're bringing additional money to the table to pay down your loan principal. And it's the hot new trend in mortgage refinancing.

Cash-in refinancing was nearly unheard of a few years ago. With real estate values soaring, cash-out refinancing was king, with homeowners borrowing against the seemingly endless growth of their home equity. So when housing prices declined, perhaps it shouldn't be too surprising that cash-in refinancing would grow more popular as well.

In fact, cash-in transactions made up one-third of all mortgage refinances in the fourth quarter of 2009, according to Freddie Mac, exceeding the 27 percent that were cash-out refinances. By comparison, in the middle of 2006, nearly 90 percent of refinances were cash-out transactions, compared to only 5 percent cash-ins.

Advantages of cash-in refinancing

Cash-in refinancing offers several advantages that make it worth considering, particularly at a time when banks have tightened their lending standards. First, it makes it easier to qualify for a refinance - if your home has lost value and perhaps is even "underwater" (you owe more than the property is worth), bringing additional cash to the table can improve your equity position.

Increasing your equity in the property can help you qualify for a better mortgage rate, particularly if you currently have less than 20 percent equity in your home. Many lenders boost the rates they charge as your equity declines. In addition, boosting your equity above 20 percent eliminates the need for private mortgage insurance (PMI) on the refinance. This is roughly equal to saving about half a percent on your interest rate, since PMI typically charges about half a percent of your mortgage balance per year.

Putting up additional cash can also bring you back "above water" and make it easier to qualify for a refinance in the first place. Even if you can't get back to positive equity, putting up a bit of cash might bring you within the range of 125 percent refinance available through the government's Making Home Affordable Program, particularly if you're presently stuck at a high rate or in an adjustable rate mortgage about to reset to less favorable terms.

A better return on your money

Another reason to think about a cash-in refinance is as an investment. Consider: if you're only earning 1-3 percent on a certificate of deposit (CD) or savings account, you can probably get a better return putting that money toward your mortgage. If you can refinance your mortgage at a fixed rate of 5.25 percent, any additional money you put in is effectively earning you 5.25 percent interest, since from a profit-and-loss perspective, interest you don't pay is the same as interest earned. In fact, you'll earn even more, considering that mortgage interest is usually tax deductable.

A word of caution, though. The above assumes that home values will remain stable or eventually rise. Should home values continue to decline, putting more money in your mortgage could mean you're throwing good money after bad. But if your home's value is the same or higher than it is now when it eventually comes time to sell, you'll come out ahead.

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