The Cash/Out refinance has been a long time favorite of home owners who wanted to consolidate debt or take out home equity for other purposes. Being able to take equity out of your home has always been a big benefit of owning real estate, though it grew to an absurd degree during the bubble years. It’s not so easy to take cash out now. For one thing the standards have been raised and lenders now require more equity retained in the home. But the bigger issue is that with home values down, many home owners have lost equity, and many are upside down owing, more on their mortgages than their home is worth. This has led to the newest major trend in lending, the Cash/In Refinance.

A cash/in refinance means you are coming to the closing table with extra money to pay down the mortgage so you can take advantage of the low refinance rates available now. This is obviously not an option for everyone. You can’t add in cash if you don’t have it. But for those home owners who do have cash available, it can make sense for a variety of reasons. Part of this is a change in attitude and a change in expectations. The old idea was that the value of real estate would always go up, and many owners bought for the short term. Now, staying put is a more realistic option for many, and if you plan on being in your home longer term, it makes more sense to get the best mortgage rates available, even if you have to invest more to do so.

Here are some reasons it might make sense to pay down your mortgage in order to qualify for a new loan:

This could be the best investment return available – If you have money in a checking or savings account, you are earning almost no interest. If you have money in stocks, the risk is high and many analysts expect the market to remain flat over the next several years. By adding cash to your home and getting a guaranteed return with a lower mortgage rate, this could be the best and safest investment opportunity available.

Get rid of your PMI – If you put less than 20% as a down payment on your home, you are require to carry private mortgage insurance or PMI. PMI doesn’t help you directly, but without it you wouldn’t be able to buy unless you had the larger down payment. If you are now in a position to pay down your loan and get it to the required 20% equity, you not only lower your interest rate, but drop the mortgage insurance. For example, if you originally put down 5% on a $200,000 loan, you are paying about $130 each month in PMI. If you can save a half a point in interest and get rid of this payment, that would be a great use of your money.

Get below Jumbo pricing – Jumbo mortgages are loans that are over the maximum lending limits for conventional financing, which is $417,000 for a single family home here in the Chicago area. There is a big difference in pricing between conventional and Jumbo pricing, currently about .75% on a 30 year fixed rate. If your loan is close to the conventional limit, or if you just got a big bonus or an inheritance from a rich uncle, this refinance could save you a lot of money. Another option is to combine this with a second mortgage or home equity loan. If the first mortgage is at 80% of the home’s value, you can get the best pricing, even if the combined loan to value (both mortgages compared to the value of your home) is higher. 

Avoid pricing hits – There are loan level price adjustments or price hits added on for all sorts of situations. There are big add-ons to the rate for having lower credit scores as well as the type of property (condos with less than 25% equity get a big price hit). These price hits can go away when you have a larger equity position. This doesn’t make sense for everyone, but it is a consideration and worth looking into.

With the housing market stagnant, it may be a while before we see values increase. If you are in a position to lower your rate and your payment, a cash-in refinance might be a good option.

Peter Thompson 630-479-6424

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