They were quite popular during the housing boom, when homeowners serially refinanced and simultaneously pulled “cash” from their homes while property values skyrocketed.
You may have also heard the phrase, “using homes as ATM machines.”
The downside to this seemingly lucrative practice was that these homeowners’ mortgage balances also grew as they refinanced.
You don’t just get free money. If you refinance and pull cash out, your loan amount grows, no ifs, ands or buts about it.
So when the housing appreciation party came to a sudden end, many of these homeowners became the proud owners of underwater mortgages – that is, they owed more on their mortgages than their properties were worth.
Enter the “cash-in refinance.”
Put simply, a cash-in refinance is the opposite of a cash-out refinance. When homeowners execute a cash-in refinance, they bring money to the closing table to lower their mortgage balance.
Let’s look at an example:
Home value: $500,000
Mortgage balance: $510,000
Maximum loan amount: $475,000 (95% LTV)
In this scenario, the homeowner is underwater and must come up with $35,000 (plus any closing costs) to execute the cash-in refinance. That would put their loan-to-value ratio (LTV) at 95 percent.
Why a Cash-In Refinance?
Borrowers may execute a cash-in refinance for several reasons.
Probably the most common reason of late has to do with the homeowners I just mentioned.
Those short on equity pretty much have no choice but to bring cash in to qualify for the refinance in question.
In other words, they won’t qualify unless they pay down their mortgage balance to a suitable level.
For some, this could be 125 percent LTV, which is the highest level allowed by some special government refinancing programs.
But for most, this is probably a level below 100 percent LTV, which is the traditional maximum allowed by conventional mortgage lenders.
However, cash-in refinances aren’t just for the distressed homeowner. Borrowers can also utilize them in order to lower their loan balances so they can qualify for a lower mortgage rate.
An example would be a homeowner whose loan balance puts them at, say, 90 percent LTV. If they bring in another 10 percent, their LTV drops to 80 percent, pushing their interest rate lower thanks to more favorable pricing adjustments.
At the same time, they avoid the need for mortgage insurance.
Bringing cash in will also lower your monthly mortgage payment and reduce the amount of interest you pay throughout the life of the loan.
Cash-In Refinance Not Always the Best Move
Sounds pretty awesome, right? Well, unless you have to bring in cash to qualify for the refinance, they may not always be the best move.
If your money will earn more in an investment account, paying down your mortgage early won’t necessarily be the right choice, especially with rates so low at the moment.
Additionally, if home prices slip further or you need cash for an emergency, having it locked up in an illiquid investment won’t do you much good.
Ironically, the very homeowners that pulled cash out over the past decade have probably taken advantage of cash in refinances recently as well.
Read more: What is a short refinance?