11 Jun To Cash In Refinance Or Not To Cash In Refinance
For many homeowners, a Cash-in Refinance (CIR) may be a great financial move. In the last decade, an abundance of Charlotte area homeowner’s have opted for cash out refinancing to take advantage of rising home prices and use their new found home equity for other uses.
With today’s interest rates on both home mortgage loans and saving accounts, a cash in refinance might be a strategic move for a homeowner to eliminate Private Mortgage Insurance (PMI), to pay off a higher interest rate second mortgage, or just to simply lower their mortgage payment.
A Cash-in Refinance is one where a homeowner will bring money to the closing in order to lower their loan to value (LTV) ratio. With a lower LTV ratio, the homeowner will get a lower interest rate and lower or zero PMI.
It is important to consult with a mortgage professional on how to calculate the rate of return but, for example, if four years ago a homeowner bought a home for $300.000 and put 10% down, then did a first mortgage for $240,000 at 5.5% and a second mortgage for $30,000 at 7.5%, the payments on these loans would be $1,363.00 and $210.00 for a total of $1,573.00.
After four years, the loan amounts are down to a total of $254,690, but the house is now only worth $275,000. To get to 20% equity, the homeowners would need to have a new loan amount of $220,000 with a Cash-in refinance. A new 30 year fixed rate mortgage of $220,000 at 5% would result in a mortgage payment of only $1,181.00, which is $392.00 lower than the current mortgage payment. Basically, if done correctly and with a professional, a cash in refinance can make you anywhere from a 10-13% return on your money!
Take the time to figure out if a CIR is right for you or if you should skip it. Consider a CIR if the following pertains to you:
- You’re a homeowner with a mortgage interest rate over 5.5%, and
- You are paying PMI, or
- You have a second mortgage, or
- You have some savings sitting around only earning 1% or less
If you are moving in a few years, skip the CIR – keep your money liquid. In fact, Fairway Independent Mortgage of the Carolinas can help you with a total cost analysis to help determine how long it would take you to re-coup the closing costs associated with a CIR. If you don’t have an emergency fund, skip the CIR. If you don’t have 3-6 months of living expenses available, begin with building that up. You don’t want to save money on a mortgage then lose it in an emergency. Finally, if you wouldn’t get the best terms on your new mortgage, skip the CIR. If your credit score isn’t top notch, you will pay a higher interest rate. The lower credit score will likely eat up most of the benefit of a lower mortgage balance of a CIR. Or, if a CIR still has monthly PMI, you probably won’t get enough savings to make a CIR worthwhile.
Speak with a mortgage professional at Fairway Independent Mortgage of the Carolinas today to complete a total cost analysis or to discuss all of your home buying or refinancing options. Call one of our offices today to get started or schedule an appointment to really look at your financial plans and help you make the best home loan decision or show you how the path toward ownership. Call us anytime. We have multiple locations across the Carolinas to make meeting convenient, or simply fill out our online application to get started.