The Pros Of A Cash-In Refinance
There are several good reasons that someone might consider a cash-in refinance, from qualifying for better loan terms to reducing your monthly payment. Cash-in refinances can allow you to:
1. Lower Your LTV Ratio And Potentially Qualify For A Better Interest Rate
When lenders set the interest rate on a mortgage, they consider the LTV, which is the percentage of your loan balance to the market value of the home. A smaller LTV indicates less risk for the lender. Because of the reduced risk, lenders often offer lower interest rates to homeowners with a lower LTV.
This consideration is especially important to homeowners with underwater mortgages, meaning they owe more than their property is worth. A cash-in refinance can help those borrowers build some equity in their home, making them eligible for refinancing and a better interest rate.
2. Get Rid Of Private Mortgage Insurance (PMI) Premiums From Monthly Mortgage Payments
Lenders usually charge PMI to borrowers to buy a home with less than 20% down. The PMI protects your lender in case you default on your loan. PMI is often 0.1% – 2% of the loan amount.
PMI usually falls off automatically once a property’s LTV reaches 78% or less. But another way to get rid of PMI is with a cash-in refinance, where you make a lump-sum payment to increase your equity in the home. As long as you have at least 20% equity with your new loan, you won’t pay PMI.
It’s important to note that if you have a loan insured by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA), this perk may not apply to you. The USDA’s Guarantee Fee isn’t cancellable. If you have FHA mortgage insurance, you’ll either pay it for the life of the loan or put down more than 10% at closing to have it removed in 11 years. To remove mortgage insurance on these loans, you can also refinance to a conventional mortgage.
3. Swap From An Adjustable-Rate Mortgage (ARM) To A Fixed-Rate Mortgage
A 15-year fixed-rate mortgage comes with several perks, including lower interest rates and lower lifetime interest payments. Unfortunately, because of the higher monthly payments, 15-year mortgages can be unaffordable for many people.
But with a cash-in refinance, you may be able to reduce your mortgage amount enough to trade in an ARM or a 30-year fixed-rate mortgage for a 15-year fixed-rate mortgage. Depending on the size of your loan, it could be a difference of tens of thousands of dollars – or even upwards of $100,000 – in interest.
4. Lower Your Monthly Mortgage Payments
Another perk of a cash-in refinance is that if you choose to stick with a longer mortgage term, you can reduce your monthly mortgage payment. As a result, you have more room in your monthly budget for other expenses.
Suppose you have a mortgage of $200,000 and an interest rate of 7%. On a 30-year fixed-rate mortgage, you would pay about $1,331 per month in principal and interest payments. If you did a cash-in refinance and made a lump-sum payment of $25,000, you would reduce your monthly payments to $1,164. You’ve saved more than $100 per month, and that’s with the same interest rate. You may be eligible to refinance at a lower rate, which would help you save even more.
5. Reduce Your Overall Debt Load
Among all the other benefits, a cash-in refinance can help you reduce your overall debt load. Some people may just want emotional freedom from debt. Others might want to reduce their mortgage balance to lower their debt-to-income ratio (DTI).
Reducing your total debt can be especially beneficial for those considering retiring early, since eliminating a large monthly payment will make retirement more achievable.
