You’ve likely heard of a cash-out refinance if you currently have a mortgage. It’s when you tap into your home’s equity and take it out as cash. Today, there’s a new refinance in town, called the cash-in refinance. Just like it sounds – it’s the opposite of the cash-out refi.
When you ‘cash-in’ you bring money to the closing table. You are not the one receiving the cash this time – the bank receives it from you. Borrowers do this for all sorts of reasons, but a big one is that borrowers are underwater. Owing more than your home is worth leaves you without the ability to refinance. If you want to refinance to take advantage of today’s low interest rates, you’re out of luck unless you have the cash to bring-in.
How Does the Cash-In Refinance Work?
The cash-in refinance isn’t all that different from any other refinance. You complete a mortgage application, provide your income documentation, and pay for a home appraisal. From there the lender determines the loan program you qualify for and the corresponding maximum LTV.
Let’s say that you want to refinance into a conventional loan. The maximum LTV would be 95%. Now let’s say that your home is worth $300,000 and your outstanding mortgage balance is $315,000. You owe more than 95% of the home’s value. In fact, you owe more than 100% of the home’s value. This would make you ineligible for a conventional refinance.
The only way it would work is if you bring cash to the closing. In this case, you would need to bring $30,000. This would bring your mortgage balance down to $285,000 or 95% of the home’s value. As long as you also had the cash to pay the closing costs, you would be able to refinance.
Why Would You Want to Use the Cash-In Refinance?
The bigger question is probably, why would anyone want to bring cash in? There are several reasons, with the most common reason being that you can secure a lower interest rate. If you took out your loan when interest rates were much higher, you might see an opportunity to save thousands of dollars on your loan. If you still have a long time left on the loan’s term, you may want to decrease how much the money costs you in the end. If you have the cash available and don’t need it for any other investments for retirement or other purposes, you can pay your mortgage balance down and save on interest.
Other common reasons to use the cash-in refinance include:
- Lowering your LTV to an acceptable level to help you have access to lower interest rates -The higher your LTV, the higher the riskiness of your loan, which means lenders will give you a higher interest rate.
- Avoiding PMI – If you owe more than 80% of the home’s value, you may have to pay for mortgage insurance. If you want to avoid it, you can pay the balance down, lowering your LTV below 80% and avoiding the insurance.
- Avoiding jumbo pricing – If the amount you owe on your home exceeds the national conforming limit of $453,100, you may get jumbo loan pricing which is higher than conventional loan pricing, costing you more interest in the end.
Give it Careful Thought
Before you jump on the bandwagon and deplete your accounts of your accessible cash, consider your options. Do you have plenty of money saved for retirement? Do you have an emergency fund? Will you need the cash in the near future for anything else?
Once you tie up the money in your home, it’s not liquid. In other words, you cannot access it, at least very easily. You would have to refinance again, this time taking out a cash-out refinance, which means a higher interest rate, more closing costs, and lengthening the term of your loan.
The cash-in refinance definitely works in certain situations. Talk to your lender about your options to make sure it makes sense for you to make a significant payment towards your mortgage, paying the balance down in order to save on interest or other mortgage related fees.