Refinancing your home is a great way to save money. Some of you may be wondering what a cash-in refinance is. Well, here's the definition:
A cash-in refinance is basically when you pay down your existing mortgage to under a certain loan-to-value ratio in order to qualify for a mortgage refinance. Loan-to-value is calculated by taking your mortgage divided by the value of your property.
Would someone refinance their home and not take money out of it? Indeed, if they could get a lower rate, build equity faster and pay off the house sooner.
For people with extra cash available, this can be very attractive compared to the low savings rates being paid by banks.
In the example below, the current mortgage is 5% for 30 years after 48 payments of $1,342.05. The owner can refinance for 15 years at 3.37%. If they put $36,000 into the refinance, their payments will be slightly more, but the mortgage will be paid off in 15 years. At that same point, if they keep the current mortgage, their unpaid balance will be $136,049.03.
If you have a goal to get your home paid off and have the available funds, a Cash-In Refinance may be just the strategy for you.
THINGS TO THINK ABOUT WHEN DOING A CASH-IN REFINANCE
It would be nice if we could make all our decisions based on simple math. The reality is there are multiple variables we also need to consider. Here are things to think about.
1) Duration. Cash-in refinances work only if you plan to own the property for an extended period, preferably the length of the loan.
2) Alternative Investments. It's always good to see if there's a better place to put your money, there might be better returns out there.
3) Employment. If you work in a volatile industry, feel your job might be at risk, and only have one or two income streams, then investing more cash into your house, despite the monthly interest savings may be a little too risky.
4) Upcoming Expenses. List out as many small and big-ticket forthcoming expenses as possible. Make sure you can comfortably pay for as many future expenses as possible.
5) The cost to refinance. A general rule of thumb is to refinance whenever it takes 24 months or less to recoup the refinance costs. The quicker the break-even points the better.