Cash-In Refinance, Does It Make Sense for You?

August 24th, 2010

The current economic climate has resulted in changes in conventional wisdom. No longer are homeowners merely looking to lower monthly mortgage payments or pull cash out of their properties. Today more and more mortgage refinances are to cut down the number of years left to pay a mortgage and for overall financial management. A case in point is the rising number of “cash-in” refinances. Using available mortgage calculators you can determine if a cash-in mortgage refinance is suitable for your family’s financial strategy.

What is a “cash-in” refinance?

Most mortgage refinances in today’s market are either a rate and term refinance, also known as no-cash-out, where the homeowner refinances to reduce the mortgage rate and monthly mortgage payment. Next in popularity would be the cash-out refinance, using equity to consolidate debt, make home improvements or pay off a home equity loan or line of credit, for example.

Increasingly popular is a cash-in refinance where the homeowner brings cash to the settlement to lower the outstanding mortgage balance. According to Freddie Mac, 22 percent of the refinances funded in the second quarter of 2010 involved the homeowner providing cash at closing to pay down their mortgage balance. In the first quarter cash-in refinances were 19 percent of total mortgage refinance transactions.

Refinance calculator shows savings

If you have a current mortgage with an interest rate at 5.5 percent and a balance of $200,000 you can refinance today to 4.5 percent for a 30-year fixed-rate mortgage at little cost. Using a refinance calculator you find your savings will be approximately $180 per month, close to 15 percent of your current mortgage payment. (Plug your own current mortgage information into the refinance calculator to see your own monthly savings.)

The results calculate the total interest payments left on your existing mortgage as well as the total interest paid over 30 years to show your savings over the life of the loan.

Are your savings making you wealthy?

Many individuals have shied away from the stock markets following the huge drop in values in 2008 and the volatility that puts their savings at risk. As a result you may have much of your savings in a money market account, a Certificate of Deposit (CD) or even a passbook savings account.

If this is the case, chances are you are earning less than 1 percent return on your savings; if you have a really good CD rate you may be earning 2 percent. On $10,000 this amounts to $100 to $200 for the entire year in interest earnings. At these rates of return you are not building wealth but rather protecting your cash.

Compare loans calculator shows return on investment

What if you could invest your $10,000 at 5.5 percent instead of 1 percent? Meaning, what if instead of keeping that savings in your local bank you used some of the money to pay down your existing 5.5 percent mortgage and obtain a new mortgage at 4.5 percent? Using the same example above of a $200,000 mortgage, using a compare loans calculator you can see that paying down the mortgage to $190,000 with your savings will give you a better return on the $10,000 than you are making now.

For the first loan, input $200,000 at 4.5 percent for a 30-year fixed rate mortgage and for the second loan put in $190,000 at the same 4.5 percent interest rate. You see that the $190,000 mortgage has a monthly payment that is approximately $50 less per month, or $600 per year. Currently you are earning only $100-200 per year for your $10,000 savings, using the savings for a cash-in refinance you will save $600 per year in monthly mortgage payments.

You can further increase your savings by continuing to make your same current mortgage payment on the new loan, with the excess going toward principal, which will take several years off the back end of your mortgage. Or you can use the monthly savings to pay down or pay off other debt that is at a higher interest rate than what you have been earning in savings.

However you choose to use the savings, take advantage of the historically low mortgage rates now available, and use the free mortgage calculators available on this site to determine if a cash-in refinance is right for you.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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