There’s a lot of talk in the market place about cash-in mortgage refinance loans. If you’re unfamiliar with this option and are struggling to refinance because you’re underwater in your home loan, cash-in refinancing could be your answer. This isn’t for everyone as it can be quite expensive depending how underwater you are in your mortgage loan. Here are some tips before you refi to help you decide if the cash-in refinance option is right for you.
Cash In Mortgage Refinance Definition
No doubt you’re already familiar with cash-out mortgage refinancing, which is simply borrowing against the equity in your home at the same time you refinance. Cash-in refinancing works in a similar way expect you’re paying down a portion of your principle balance as part of the transaction. This works well for homeowners who are underwater in their home loans hand cannot qualify due to unfavorable loan-to-value ratios.
Should You Pay Out Just to Qualify?
Declining home values and our terrible economy have contributed to record numbers of homeowners being underwater in their mortgage loans. (Underwater means you owe the bank more than your home is worth and have no equity) Lenders don’t like taking on properties with negative equity because the risk outweighs any gains from carrying the home loan. Homeowners who are underwater are much more likely to walk away from a property than those who share ownership in their home.
The decision to go forward with this type of mortgage refinance depends on how much you’ll have to pay to qualify, how much the closing costs and loan origination fees will run you, and how long it will take you to recoup these expenses with a lower payment amount. If your budget is in a pinch and you have access the cash to pay down your balance to a favorable loan-to-value ratio, refinancing to a lower monthly payment could give you some much-needed breathing room in your budget.
Using Retirement Accounts to Qualify for Mortgage Refinancing
Some homeowners are raiding their 401k and other retirement accounts to get their hands of the cash to pay down their home loan balances. I’m not here to give you long-term financial advice; however, if you’re in a bad financial situation and are emotionally vested in your home, cracking the piggy bank on your 401k could offer you the means to get out from under negative equity in your home. The downside is your retirement plan will suffer a setback.
Once you’ve decided to go forward with your cash-in mortgage refinance you can cut your out-of-pocket expenses by minimizing your loan origination fees and closing costs. This will allow you to recoup your expenses more quickly and benefit from your new, lower payment amount.
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My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
This probably doesn’t make sense for most people.
Say your currently have 100% LTV, loan amount is $300K and term is 30 years fixed . To refi, you were offer 4.6% ($1537 monthly payment) at no closing cost and original fee . In order to get the best rate 3.85% ($1406 monthly payment), you have to get to 80% LTV which means you have to pay 60K (20% of 300K) towards your principle. That’s only $131 difference in monthly payment, and it will take 60k/$131= 509 payments or 47 years to recoup. Am I right?