Cash-in vs. cash-out refinancing

Posted by  on Jan 12, 2011

About a third of homeowners who refinanced in the third quarter of 2010 were able to lower their principal by bringing cash to closing. That's the second highest level of cash-in refinancing since Freddie Mac began following refinance patters in 1985. While many homeowners rushed to take cash out of their homes during the housing boom, more homeowners are paying their loans down in an effort to reduce their mortgage balances.

Refinancing in the U.S.

Freddie Mac data show that 18% of all refinance loans increased the loan balance by at least 5 percent, which was the lowest cash-out share ever. An estimated $7.4 billion in net home equity was cashed out during refinancing of conventional prime-credit mortgages, down from $9.4 billion in the second quarter.

Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement:

When rates fall to new lows we typically see more 'rate and term' refinancers, who are looking only to reduce their interest payments, and relatively few cash-out borrowers. But now we're also seeing a very large share of borrowers reduce their mortgage debt when they refinance. Consumer debt across the board is down since the start of the recession, which non-mortgage consumer debt falling more than 5 percent since 2008, according to the Fed.

Putting money into your home when refinancing

If you're planning to refinance, here are some things to consider about a cash-in refinance:

  • Bringing a lump sum of cash to closing could be the thing that gets a mortgage lender to agree to a refinance if you've lost a lot of home equity over the past couple of years.
  • Making a payment at closing could give you enough equity to avoid mortgage insurance (MI), which is usually required if you have less than 20% home equity.
  • A cash-in refinance may allow you to decrease the remaining principal on your loan enough that you would be able to afford the monthly payments on a mortgage with a shorter term.
  • Does it make sense to use your lump sum of cash to pay down a mortgage? Depending upon your financial situation it may be better to use the money to pay off high-interest credit card debt or contribute to an emergency fund.

Pulling money out of your home in a refinance

Tapping home equity by refinancing can give you cash that can be used for any purpose. Keep the following tips in mind about cash-out refinancing:

  • The fact is that even if you want to do a cash-out refinance you may not be able to. That's because many mortgage lenders are reluctant to approve refinancing that involves drawing down equity. Too many homeowners have ended up underwater on mortgages because of a combination of declining home values and outstanding home equity loans.
  • Home values have fallen significantly in many areas. Cashing out home equity now could come back to haunt you later if housing values continue to decline; you could end up underwater on your mortgage.
  • You shouldn't cash out home equity for frivolous purchases. Think long and hard before using your home as a piggy bank and ask yourself if there is another way to get the money you need.

A home refinance might help lower your mortgage rate and monthly payments. Compare refinance rates from several lenders to find the right refinance deal.


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