Remember the old commercials urging people to turn their home equity into cash for new cars, vacations and other luxuries? Well, people are still cashing out, but for a different reason: to decrease the size of their home loan.
MarketWatch reported today that “cash-in refinancing” is the new trend in which borrowers tap their home equity and, instead of putting it into their pockets, are putting that money into their mortgages, especially when they want to refinance. And with mortgage rates at record lows — 4.56% for 30-year fixed-rate mortgages and 4.03% for 15-year fixed-rate mortgages for the week ending July 22, according to Freddie Mac — people will reduce their debt significantly.
Many homeowners are resorting to paying down the mortgage instead of investing in CDs or stocks. CDs don’t have the same high yields as in years past and the stock market’s volatility have made many people bearish.
Some of the advantages of a cash-in refinance include:
● By using the extra cash, borrowers would no longer have to pay private-mortgage insurance (PMI), which is required when the mortgage is more than 80% of the home’s value. The extra money would allow borrowers to eliminate PMI, thereby saving monthly premium costs.
● Borrowers can use the extra money to help them get the lowest rates possible, provided the loan-to-value ratio is less than 60% and the borrower has a FICO score above 740.
● The extra money brings the homeowner’s mortgage under the conforming loan limit so they do not have to pay higher jumbo rates. The money can also help homeowners reduce their mortgage term from 30 to 15 years to make their monthly payments more bearable.
According to Freddie Mac, 18% of all refinanced mortgages in the first quarter of 2010 were cash-in refinances — less than half of what it was in the previous quarter. However, many underwater homeowners may consider a cash-in refinance if they can find no-cost refinancing or get help from the government’s Home Affordable Refinance Program (HARP), despite being short on home equity.