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Should you consider a cash-in refinance?

[Apr 28, 2011.]


According to Freddie Mac, 46 percent of people who refinanced mortgage loans in the 4th quarter of 2010, brought cash to closing. That was the highest "cash-in" share Freddie Mac ever recorded. So why are so many homeowners flocking to cash-in refinancing, and should you?

Refinancing and home equity

Homeowners across the U.S. have lost home equity during the past few years as the economy has struggled. In some housing markets, prices have dropped so drastically that entire communities are underwater on home mortgages, which means they owe more than the properties are worth. There are still enough homeowners who have positive home equity, but not necessarily enough to qualify for a refinance deal. For some of those people, a cash-in refinance could make sense.

Mortgage lenders like cash at closing

Bringing cash to closing not only can boost your home equity, but might be the thing that convinces a mortgage lender to take a chance on underwriting a mortgage. Many mortgage lenders are still reluctant to approve refinancing to people with less than 20 percent home equity. If you receive a large bonus or have a savings that can be tapped, consider using some of it to increase your equity and get the green light on refinancing.

Dump mortgage insurance payments

Another incentive for a cash-in refinance may be getting rid of monthly mortgage insurance (MI) payments. MI is required when the down payment on a mortgage is less than 20 percent. It also may be required when you refinance because of falling home values in the area you live in. Whatever your home appraises at determines how much equity you currently have. If you fall just shy of 20 percent, bringing cash to closing to avoid MI may make sense.

Do you have a lot of debt?

An important thing to consider before throwing a lot of cash at your mortgage is whether or not you have your financial house in order. If you have a lot of high interest credit card debt or other bills, using a cash windfall for refinancing is probably not too smart. That money would probably be better directed at paying down credit card bills and other debt. It's also important to evaluate whether you can really afford to take money out of savings for a refinance. Will doing so leave you without an emergency fund?

Bringing cash to closing can be a savvy way to lower your interest rate and mortgage payments. Just be sure to run the numbers carefully and take time to scrutinize your overall financial strategy.


About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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