Should you consider cash-in refinancing?

Posted by  on Feb 21, 2014

When housing values were in rapid ascent, many homeowners opted for a "cash-out" refinance in order to use their home equity for other investments, to pay off debt, to make a home improvement and sometimes to take a vacation. When home values started to decline and the recession pushed more families to face unpleasant fiscal realities, some homeowners opted for a "cash-in" refinance to reduce their loan balance. While there are several reasons you may want to pay down your mortgage balance, you need to think carefully about whether this is the best use of your cash and perhaps consider other ways to reach your end goal of a paid-in-full mortgage.

Refinancing with cash

Some of the reasons to consider a cash-in refinance include:

·You're still underwater on your home loan. According to RealtyTrac, 19% of homeowners with a mortgage owed more than the value of their home in December 2013. If you're among those owners, you may be thinking that you need to pay down your loan balance in order to refinance, but you can also look into the benefits of HARP refinancing, designed for your exact situation.

·You want to eliminate private mortgage insurance (PMI). If your loan-to-value is close to 80 percent, you may be considering paying cash so that you can refinance without PMI. If you have plenty of cash, that's certainly an option, but you should talk to a lender about your options for paying PMI that could help you reduce your monthly payments. You can also choose to pay extra on your loan each month to accelerate your loan payoff without digging deep into your cash reserves all at once.

·You want to qualify for the lowest possible interest rates. Compare your current mortgage rate with today's mortgage rates to see how much you can save on your mortgage payments. You'll pay a slightly lower interest rate when you have a lower loan-to-value, but make sure that rate difference justifies the reduction in your available cash.

·You want to reduce your debt-to-income ratio. A cash infusion will lower your loan balance and your payments. If you're on the edge of the maximum allowable debt-to-income ratio, reducing your principal could help you qualify as well as get a lower mortgage rate.

·You want to shorten your loan term. If the payments on a 15-year loan are just out of reach at your current loan balance, paying it down could help make them more affordable.

Before you commit to spending money that you won't be able to get back, you should look at your overall financial plan and make sure your cash wouldn't be better spent reducing other debt, funding a college tuition plan or increasing your retirement savings. You consider prepaying your mortgage either with extra funds each month or an extra payment each year. Prepayments reduce your balance without causing a cash shortage.

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