Ask Our Broker With Peter G. Miller: Cash In?
Q: We want to reduce our mortgage debt, and with it our monthly payments. A lender said we need a “cash-in” refinance. Never heard the term before — what is it?
A: Usually when we think of refinancing, we think in terms of either getting a lower rate — a “rate and term” refinance — or a cash-out refinance, a new mortgage which allows us to get cash from the property’s increased value.
At this time there’s a lot of additional equity in our homes. On average, according to the S&P CoreLogic Case-Shiller Indices for May, home prices since February 2012 increased 48.5 percent. With so much new equity — really, catch-up equity for the money lost during the mortgage meltdown — you might expect a lot of refinancing to get cash from growing home values. However, because of rising mortgage rates, the “rate and term” part of the refinance market is largely dead. The Mortgage Bankers Association says that as of late May, the Association’s “Refinance Index” had reached its lowest level since December 2000.
The refinancing that we’re now seeing is largely cash-out activity. However, there is also some “cash-in” refinancing, meaning that people are replacing old loans with smaller ones. As an example, if Smith has a $20,000 certificate of deposit which earns 2.5 percent, it might make sense to pay down a mortgage with a 4.5 percent rate. Not only is Smith “earning” an additional 2 percent, but there is no tax on a “savings,” the interest not paid because the mortgage is smaller.
Are you paying mortgage insurance? If you reduced the existing loan balance with one large payment — called a “curtailment” – will the lender agree to end the requirement for mortgage insurance? Lenders in many cases will agree to such arrangements if the debt is reduced to 80 percent of the original purchase price, and you have a good payment history.
With a cash-in, you get two benefits. First, there is a lower monthly cost because the debt is smaller. Second, you will no longer pay mortgage insurance premiums. Make sure the lender’s agreement to end mortgage insurance is confirmed in writing before sending in a check.
As an example, suppose your home was purchased for $400,000. You bought with 5 percent down, and the mortgage amount was $380,000 at 4.5 percent interest. Five years in and after a $26,400 curtailment, you can save $3,321 a year — or $276 a month.
For details and specifics, speak with your loan servicer and financial adviser.
Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to email@example.com.
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