Most of us have heard the term ‘cash out refinance’, where you borrow extra money from the equity in your home. So, if a cash out refinance is where you get money, a cash in refinance would be when, you guessed it, you actually put money into your home during a refinance transaction.
When Should a Cash In Refinance be Considered?
There are several instances that a cash in refinance could be extremely beneficial. This is by no means a complete list, so you should always consult a mortgage professional (as well as your financial adviser) before making a move. Some situations that a cash in refinance may make sense might be:
If You Are Currently Paying Mortgage Insurance
Let’s face it, mortgage insurance is a huge waste of money for a home owner. It insures the bank, not you, against defaulting on the loan. So, if you stop making your payments, the bank is covered. Home owners refinancing into a conventional loan, at or under 80% of the home’s value do NOT have to pay mortgage insurance.
Example:
- You owe $200,000 on your mortgage.
- Your home is currently worth $240,000.
- Your current loan-to-value ratio (LTV) would be around 83.3% ($200k / $240k)
- Since mortgage insurance is only charged on loans over 80% LTV…
- Contributing $8,000 of your own money (plus whatever, if any, closing costs incurred) will bring your LTV to 80% ($200k current loan balance – $8,000 cash = $192k loan balance, divided by the $240k current home value = 80%) and eliminate your mortgage insurance forever!
If You Are Nearing Retirement
Retirement can have a significant impact on your monthly cash flow. Often times, new retirees have a difficult time adjusting to a lower, fixed income and experience financial hardships that may very well be avoidable. By contributing cash to your refinance that may be sitting in a low interest yielding account (such as a checking or savings account), you could greatly reduce your monthly mortgage payments and adjust them down to your current income level.
If you are able to contribute enough funds to bring your loan-to-value ratio under 65% of the value of your home, it may even be possible to obtain a reverse mortgage and stop making mortgage payments altogether! Keep in mind, that obtaining a reverse mortgage is a big decision and should be done only after consulting with a licensed mortgage professional.
If You Want to Reduce Your Loan Term
With mortgage rates still close to all time lows, many home owners are taking the opportunity to shorten their loan terms and drastically reduce the amount of interest they pay over their lifetime.
But, switching from a 30 year mortgage to a 15 year mortgage may increase your monthly payments mortgage than you are comfortable with…enter the cash in refinance. By lowering your loan amount and interest rate, you may just find the right combination and cut your loan term in half, while keeping your payments the same!
