When 'cash-in' refinancing pays off

(MONEY Magazine) -- At the height of the housing boom, millions of Americans treated their houses like ATMs, pulling out money through "cash-out" refis. Today, with millions of mortgages underwater, money is flowing in the opposite direction.

Want to refinance at today's low rates? Well, lenders want you to have equity of at least 20%; if you don't, you must add cash to make up the difference. No wonder "cash-in" refis accounted for 22% of all refinancing activity in the second quarter.

But is now the time to put money into your home? Here are three cases where cash-ins can pay off -- and three where they won't.

1. You can lower your mortgage rate significantly: You can qualify for rock-bottom rates recently -- 4.4% for a 30-year fixed loan -- as long as your loan-to-value ratio is below 75% to 80%, says Freddie Mac chief economist Frank Nothaft. Are you close to that cutoff and have plenty of cash to spare? Then bring enough to the table to push you below that threshold.

Have a jumbo loan but are extremely close to the cutoff for a conforming loan ($417,000 for single-family homes in most markets)? Then toss in enough extra money to get out of jumboland when you refinance. The average fixed rate on a 30-year jumbo is about 5%; rates on a conforming loan are a half percentage point lower.

2. You can avoid PMI: If your loan-to-value ratio is above 80%, you have to shell out for private mortgage insurance, which averages $1,500 a year on a $300,000 loan. But you could avoid having to pay PMI by putting enough cash in so that your LTV ratio falls below 80%.

3. You want to pay off your mortgage faster: Some homeowners are putting cash in so that they can afford the payments when they refinance a 30-year loan into a 20-, 15-, or even 10-year mortgage, says Anthony Hsieh, CEO of online mortgage lender LoanDepot.com.

Even with the extra cash, your monthly payments will be higher on a shorter loan. But over the life of the mortgage, the total interest savings can be huge (see the chart).

1. You plan to be in your home for less than five years: At today's rates it will probably take you a couple of years of lower payments in a conventional refi to recoup your closing costs. But cash-in refis can often take more than twice that long to break even, says Keith Gumbinger of HSH Associates. So unless you plan on staying put for a while, don't put in the extra money.

2. Your credit score isn't so great: Say your current mortgage is at 5.5%, but you want to take advantage of today's much lower rates. If your credit score is low, there's a good chance you won't qualify for a sub-5% rate on a 30-year fixed mortgage. In fact, homeowners with scores below 680 probably won't get a low enough rate when they refinance to make a cash-in pay off.

3. You're strapped for cash: To come up with the money to orchestrate a refi, would you have to tap your six-month emergency fund? Then forget it, says Gumbinger. The risk is too great that you'll lack liquidity should calamity strike.

Yes, you may be able to pull that money back out of your house through a cash-out refi a few years down the road -- or you may not. If home prices continue to stagnate, you could be stuck. In July sales of previously occupied homes fell to the lowest level in decades, suggesting that a housing recovery is still a long way off.