Is Cash In Refinance A Good Idea For You?
To lower your LTV so you can refinance
Increasing your equity with a cash-in refinancing also lowers your loan-to-value ratio (LTV) and thus increases your flexibility for future refinancing. You can think of the LTV as the reverse of equity. If you have 20% equity in your home, your LTV is 80%.
LTV is important because most major credit options outside of VA loans require that you have at least 20% equity in your home after refinancing in order to receive a payout. While you don’t want to withdraw cash in a cash-in refinance, you may want to give yourself the option in the future by making a substantial payment now. If you buy a property with 3-4 units, you also need a maximum of 75-80% LTV for refinancing.
To shorten or extend your credit period
Another reason for cash-in refinancing is to shorten or extend your repayment period. By shortening your loan term, you get a lower interest rate compared to longer term loans because investors don’t have to extrapolate inflation as much. You will also save thousands in interest by paying off your mortgage sooner.
On the other hand, a longer term mortgage means the option of having a lower monthly payment. The tradeoff is a higher interest rate as inflation continues to be projected. You also pay more interest by taking longer to pay off the mortgage. However, if you need the money you put in your home for other things, this is a great option.
To switch from an ARM to a fixed-rate mortgage
Adjustable rate mortgages (ARMs) have the advantage of a lower interest rate compared to current market rates, as their adjustable nature means investors don’t have to try to guess where inflation is going to be as they are adjusted up or down at any time can the teaser phase. People might even get into ARMs because they plan to move before the adjustment happens.
However, if you are staying at home longer or interest rates are rising at the time of your adjustment, consider a fixed-rate mortgage. With a fixed interest rate, you have payment security for the duration of the term. In this scenario, cash-in refinancing can make sense.
Get rid of mortgage insurance
Conventional and FHA loans have forms of mortgage insurance that you must pay if you pay less than 20% down payment on your home purchase. In fact, on FHA loans with an initial down payment of less than 10%, the mortgage insurance remains in place for the life of the loan. While this will help you buy a home without using up all of your savings, no one is happy to pay an additional monthly fee if it can be avoided.
With a cash-in refinancing, you can increase your equity to at least 20%. Refinancing to a conventional loan can help you avoid future mortgage insurance payments on your home if it is a main property.
To refinance a jumbo loan into a compliant mortgage
You might want to refinance but currently have a jumbo loan and want to take out a loan with regularly compliant mortgage limits – for example, $ 548,250 for a 1-unit property. After all, the interest rates can be similar, but the requirements for jumbo loans can be stricter. You can opt for cash-in refinancing to get below the compliant mortgage limit.
Take a step into a debt-free future
For some, a cash-in refinance can be seen as a stepping stone to paying off your mortgage faster. Many homeowners have a formal or informal goal of getting out of debt as quickly as possible. By putting a lot of loose change in their home and potentially shortening the term, they can pay off the mortgage much faster.