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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
Introduction to Cash-in Refinance
A type of refinancing where a homeowner makes a lump-sum payment on their home loan during the refinance process is a cash-in refinance.
The homeowner replaces their current mortgage with a new one that has a smaller principal balance.
What does Refinancing usually mean?
Usually refinancing means replacing the current home loan with a new mortgage but to decrease their mortgage balance homeowners can also put down additional money.
To meet their lender’s loan-to-value (LTV) requirements for refinancing could be a common reason why homeowners may put more money down when refinancing.
Before refinancing lenders require that homeowners have at least 20% equity in their homes and if they have less than 20% equity but need to refinance, they could use a cash-in refinance.
With a cash-in refinance they make a lump-sum payment to reach 20% equity.
Cash-in refinance vs Cash-out refinance
A cash-in refinance is not the same as a cash-out refinance. With a cash-out refinance, homeowners borrow more money than they currently owe on their mortgage, and this difference they receive in cash.
They are used for debt consolidation or financing home improvements.
The closing on a cash-in refinance and of a cash-out refinance are exactly the opposite. While doing a cash-in refinance, the homeowner brings a check to the closing table with your lump-sum payment, which will further reduce the balance of a new mortgage.
Whereas with a cash-out refinance situation, the homeowner takes out a larger mortgage and leaves the closing table with a check in hand.
Pros of Cash-in Refinance
Right from qualifying for a better loan term to reduce their monthly payment, there are several reasons why a homeowner might consider a cash-in refinance.
To lower their LTV ratio and qualify for a better interest rate:
Lenders consider the loan-to-value ratio (LTV) when they set the interest rate on a mortgage, this LTV is the percentage of one’s loan balance to the market value of the home. The larger the LTV, the riskier it is for the lender.
And because of the increased risk, lenders often offer higher interest rates to homeowners with a higher LTV and vice versa.
To avoid PMI payments:
The borrowers who buy a home with less than 20% down are usually charged private mortgage insurance (PMI) by the lenders.
This PMI which is often 0.5% – 1% of the loan amount protects the lender in case you default on their loan. So if the mortgage is $200,000 would have PMI ranging from $1,000 – $2,000 per year.
Usually, once a property’s LTV reaches 78% or less the PMI drops off. However, another way to avoid PMI is with a cash-in refinance, where the homeowner makes a lump-sum payment and increases their equity in the home.
As long as they have at least 20% equity with their new loan, they don’t need to pay PMI.
But if the borrower’s loan is insured by the FHA, VA, or USDA, then avoiding the PMI clause does not apply to them.
As the FHA’s mortgage insurance, VA’s Funding Fee, and the USDA’s Guarantee Fee aren‘t cancellable, so refinancing will not help to eliminate the fees.
Possibility to move the term to a 15-year fixed-rate mortgage:
There are several advantages with a 15-year fixed-rate mortgage like lower interest rates and lower lifetime interest payments.
15-year mortgages are unaffordable for many people only because of the higher monthly payments.
Depending on the size of the loan with a cash-in refinance, the homeowner may be able to reduce their mortgage amount from a 30-year fixed-rate mortgage or from an adjustable-rate mortgage to a 15-year fixed-rate mortgage and save tens of thousands of dollars in interest.
Lower their monthly mortgage payments:
Another advantage of a cash-in refinance is that, even if they choose the longer mortgage term, they can reduce their monthly mortgage payment and save on their monthly budget for other expenses.
A cash-in refinance can help in giving freedom from debt and reducing the overall debt load. Some people may want to reduce their mortgage balance to lower their debt-to-income ratio.
For those considering early retirement reducing their total debt can be beneficial, as eliminating a large monthly payment will make retirement more achievable.
Cons of Cash-in Refinance
While there are many benefits to a cash-in refinance, it’s not necessarily the right choice for everyone. Let us look at the downsides.
Incurring additional refinance costs:
Just like taking out a first-time mortgage, refinancing a mortgage, requires upfront closing costs. In most cases, the borrower needs to pay 2% to 3% of their loan balance in closing costs.
If the borrower isn’t planning to stay in their home for long, it does not make sense to incur those costs.
Borrowers can calculate their break-even point by figuring out how many months it would take to recoup their upfront closing costs to identify if refinancing is a good decision. If they don’t plan to stay in the home until that time, then refinancing is senseless.
Your funds will be blocked:
In the case of a challenging financial situation, homeowners should have cash reserves in a highly liquid savings account to avoid foreclosure. If a cash-in refinance is emptying their savings, then it is not the right choice.
Missing out on other opportunities:
When a large amount of payment goes toward the mortgage it means less money to use for something else. The money used on a cash-in refinance could either be used to pay down higher-interest debt or make higher-earning investments.
The mortgage’s prepayment clause might not allow it:
If a borrower pays their home loan off early lenders may charge extra because some mortgages come with a prepayment penalty.
These fees also apply when they refinance. Though government-backed loans from the FHA, VA, or USDA do not levy penalties, it’s important to read the fine print of the mortgage before doing a cash-in refinance.
Alternatives to a Cash-in Refinance
I - Extra payments
If paying off your mortgage early is the goal, a cash-in refinance is not necessary. Borrowers can either make a single lump-sum payment on their mortgage or make recurring extra payments to finish off their loan faster.
II - Mortgage recast
A mortgage recast is another option in place of a cash-in refinance, where a lump-sum payment is made toward the loan balance, and the lender agrees to re-amortize the mortgage.
Instead of starting with a fresh loan, a mortgage recast allows borrowers to re-amortize their existing one, thereby reducing the monthly payment. A lump-sum payment of $5,000 or more is generally required for a mortgage recast.
A recast has a fee associated with it, but it’s not more than a few hundred dollars, which is comparatively less than the cost of a refinance.
Conclusion
A cash-in refinance can be an ideal choice to ease the monthly payments and be debt-free sooner.
If a homeowner has come up with a huge amount of money from an inheritance or a tax refund then cash-in refinance can be a great option. But it’s important to do your research before choosing that option.
