A cash-in refinance, or paying down the principal of a loan, is a mortgage refinance when a homeowner brings a check to closing and gets a new mortgage for a smaller amount. But unlike the cash-out option, in which the short-term benefits were tangible -- like money, a renovation or a new car -- the advantages of a cash-in refinance are not quite as obvious.
With many Americans concerned about their future economic stability and wanting to pay down their liabilities, there's a reason why the cash-in refinance is becoming the more attractive mortgage refinance option. Here are four ways mortgage holders can benefit from the cash-in refinance and why it might be right for you:
1. You can move from a jumbo to a conventional loan.
Many mortgage brokers agree that a cash-in refinance is typically for a homeowner who has a fixed-income or who has additional money to contribute to their loan amount and might benefit from a mortgage refinance.
Find a local expert contractor who has been pre-screened by ServiceMagic For these candidates, one of the biggest upsides may be paying off enough of their mortgage to move from the interest rate of a jumbo loan to a conventional rate. A jumbo loan, a type of mortgage required on larger, riskier loans tend to have higher interest rates. Although the deviation between the two interest rates is normally a .25 to .5 percent spread, the housing downturn has caused jumbo interest rates to spike as high as 1.5 percent above the fixed loan rates in 2007 and now hovers about 1 percent higher.
Determining how much you need to pay to start saving from the lower interest depends on the conforming loan limits for your area. Anything above the limit, which in many locales is $417,000, is considered a jumbo loan, so you would want your mortgage to fall under that amount. However, in high-cost areas such as New York City or San Francisco, Calif., the limit is $729,750. Check with Fannie Mae to see the limits for your home's location.
According to Joe Caltabiano, a senior vice president at the Chicago-based Guaranteed Rate brokerage company, it's prudent for a homeowner with a mortgage in the vicinity of $500,000 to reduce their loan amount to $417,000 and qualify for a lower interest rate. With an improving economy and historically-low rates, Caltabiano says, more are gaining the confidence to pay down their loans through a mortgage refinance, which he thinks makes the most sense when homeowners have uninvested money sitting in a low-yield checking or savings accounts.
2. Depending on your home equity, you may be able to even lower your interest rate under a conventional loan.
Even if you don't have a jumbo loan, you may be able to cut your interest rate through a cash-in refi, depending where you are on your loan-to-value ratio. Loan-to-value, or LTV for short, is an equation that lenders use to evaluate risk in issuing a mortgage refinance. It compares the amount remaining on your loan to the assessed value of your property.
Ideally, homeowners would be at an 80 percent loan-to-value. As long as you have a good credit score, generally, a lower LTV means you can get a lower interest rate.
Tom Vanderwell, a mortgage lender who also writes for the blog, www.straighttalkaboutmortgages.com, says the quasi-governmental mortgage giants, Fannie Mae and Freddie Mac, sell loans at higher LTV's than the traditional 80 percent -- ratios as high as 90, 97 and 105 percent. For one of his clients who is at a 99 loan-to-value, he's recommending paying the two percent in value to refinance at the 97 loan-to-value and reap a quarter of a point lower interest rate. However, Vanderwell adds, those with a lower credit score looking for a mortgage refinance are going to get knocked on interest rates regardless of their loan-to-value position.
3. Reduce your mortgage insurance costs.
Private mortgage insurance, better known by the acronym PMI, is an insurance payment required by lenders when homeowners have less than 20 percent equity in their home. Homeowners who increase the equity in their home during a mortgage refinance can eliminate these monthly mandated fees; then they can put the subsequent savings toward their principle.
Kirk Tatom, president and owner of Tatom Lending LLC in Dallas, Texas, estimates that homeowners with a $200,000 loan have yearly PMI costs of around $1,600 -- a substantial amount of money that helps lower the overall loan balance. "You don't have to be a brainiac to know you can bring $2,000 to the table and save $2,000 a year," he says.
Since the costs incurred from PMI usually work out to be a half of a percent on your mortgage balance, another way to estimate what you could be saving is to figure a half percent on your interest rate.
4. Bringing more money to the table may streamline the refinancing process.
If home prices are falling, you also might need to fork over extra dollars to make sure the mortgage refinancing happens easily. And you might be even more motivated if interest rates are low and you want to lock in a rate that will save you money in the long term.
Here's how it works. If your $200,000 house is appraised by the lender for $150,000, in order to maintain 20 percent equity a refinanced loan cannot be more than $120,000, or 80 percent of the home's current value of $150,000. If the homeowner owes more than $120,000, they'll have to cover the difference or pay for PMI.
Under the Mortgage Disclosure Improvement Act, brokers say that it takes 10 business days to change the amount of a loan. During this time, differences in appraised values, accruing interest, and other fees can affect the daily balance of the loan, and this could mean that you owe more (or less) when it's time to sign your new loan agreement.
For convenience and to secure a low interest rate, which by regulation can only be locked in for 30 days, brokers say it's not unusual for their clients to cough up the extra money to start saving money sooner.
Learn more about mortgage refinancing in our guide: "Refinancing Dos and Don'ts."
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