Over a Third of Refinance Deals Involve "Cash-In"

Posted by  on Sep 20, 2010

"You must spend money to make money." Roman poet Titus Maccius Plautus sometimes gets the credit for that quote, which often swirls around corporate boardrooms during budget season. However, the Wall Street Journal reports that more Americans are discussing that concept around the dinner table when thinking about the state of their underwater mortgages. With real estate prices and mortgage rates near generational lows, extra cash invested in your home might qualify you for a refinance deal or even a new home loan.

For the first time since Freddie Mac started keeping track in 1985, more than a third of American refinance deals involve "cash-in." If you rode out the financial calamities of the last few years with a healthy retirement account or an emergency cash fund, a soon-to-rebound housing market might be more attractive than a stock index fund. The Journal reviewed one such deal in which a homeowner paid $29,000 up front to refinance a home that had lost nearly 10% of its value. By refinancing into a twenty-year fixed rate mortgage, the homeowner will save $95,000 in interest while reducing monthly expenses by nearly $150.

Other Americans use a similar kind of math to "trade-up" their underwater mortgages. The process most closely resembles the kind of financing you see on a new car lot. Like a cash-in refinance, a mortgage trade-up deal requires some emotional courage and a commitment to a long term ownership strategy. An example cited in the Journal report resulted in a $25,000 cash investment to cover short-term losses. However, the traded-up property includes twice the square footage and improved amenities with only a $390 increase in monthly expenses.

Both of these strategies benefit consumers with cool heads and little emotional attachment to the idea of "paper losses." Waiting for the real estate market to improve could mean missing out on record low mortgage rates. Likewise, shifting capital away from other investments could mean missing out on a sudden stock market "pop" or even a medium-term securities market recovery. Talking to experienced mortgage lenders about the risks of a "cash-in" or a "trade-up" can open your eyes to money-saving potential. But either of these strategies also requires heart-to-heart conversations with your family members and loved ones on what is the best thing to do right now.


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