For the past decade many homeowners have taken advantage of cash-out refinancing, taking out a new mortgage with a loan amount that’s bigger than the balance on the old mortgage with the homeowner receiving a check for the difference at closing. However, today mortgage lenders are seeing much more of what’s known as “cash-in” refinancing where the borrower refinances their home mortgage for a smaller amount than their old loan, with the homeowner taking a check to the closing.
Why is this happening? It’s happening because of low appraisals. People are bringing in cash as a means of repositioning their money so they can still qualify for the historical low mortgage rates we’re experiencing in today’s market. In fact, a growing percentage of Freddie-Mac owned refinancings are “cash-in” refinances, with cash-in mortgage refinances outnumbering cash-out refinances.
There are two reasons why cash-in refinances are more in vogue than before. First, homeowners do cash-in refinances to avoid mortgage insurance. They also do cash-in refinances to avoid jumbo limits. Either way, the homeowners save money.
It’s a matter of doing some simple cash-in math. If your loan is for more than 80% of your home’s assessed value, mortgage lenders typically require private mortgage insurance. And quite often refinancing is not worth it when mortgage insurance is required. When borrowers go to refinance falling home values are what often squeezes them past the threshold. For example, if you bout a $100,000 home at the real estate market’s peak and now your house is appraised for $80,000, refinancing the loan can’t be for more than $64,000 without if you want to avoid having mortgage insurance. But borrowers have a choice. They can go to closing with a check for the difference or pay PMI.
The number one reason why people aren’t closing on a loan these days is because of fallen home values. By bringing money to closing they’re able to lower their loan amount so they can bring their loan-to-value below 80%. Many homeowners aren’t sold on this idea. But they should consider other ways of using the $10,000 they might bring to closing. Why put $10,000 into a money market earning less than 1% when you could pay down your mortgage and avoid paying 4 and 7/8% on $10,000?
Few homeowners who set out to refinance their home mortgage think they’ll put four to six grand toward their mortgage that day, doing cash-in refinancing. But when they realize that bringing money in helps them to capture a better rate, they’re more open to the idea.
Even borrowers on the upper end of the market are taking advantage of cash-in refinancing to avoid higher rates and jumbo mortgages. Home loans for more than $729,750 are considered jumbo loans. If a homeowner owed $775,000, they could take advantage of a lower rate by reducing their new mortgage’s loan amount to $729,750 or less. While a check for $50,000 at closing may be hard to swallow, it still beats paying more in interest on it than you would earn having it in a money market.
Speaking with a Homestead loan officer is the best way for a homeowner to determine if cash-out or cash-in refinancing is the best for them.