When 'cash-in' refinancing pays off

chart_big_payoff.top.gif Ismat Sarah Manglais

(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.

When to put cash in

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).

When to hold onto your money

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.  To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.80%3.88%
15 yr fixed3.20%3.23%
5/1 ARM3.84%3.88%
30 yr refi3.82%3.93%
15 yr refi3.20%3.23%
Rate data provided
by Bankrate.com
View rates in your area
Find personalized rates:
  • Find Homes for sale
    Real estate and homes for sale on Trulia

  • Property Type
  • Find a home in: New York | Atlanta | Chicago | Los Angeles
  • Washington D.C | Houston | Philadelphia | More options
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET


Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.