As home prices decrease across the nation, a new refinance option has grown increasingly popular. This option is called a cash-in refinance. This type of refinance is structured much like a home purchase mortgage in that the borrower makes a large lump sum payment at closing, similar to the down payment made at the close of a home purchase loan.
The primary purpose of a refinance is to take advantage of the lowest mortgage rates available. But in addition to taking out a new loan to cover the balance of the old one, many borrowers have chosen to use the refinance as an opportunity to pay down the balance of the loan itself. There are several reasons why borrowers have begun to do this.
1. If a borrower doesn’t have 20% equity in the home, he or she will have to pay for private mortgage insurance along with the new loan. This often destroys the value of the new interest rate. A lump sum payment that increases the borrower’s equity to 20% can prevent this added expense. 2. Borrowers can use the refinance as an opportunity to simply decrease the total balance of the loan by paying into it in one lump sum. This can save significant money over the long run and can help secure better interest rates and terms.
These benefits and others have helped make cash-in refinances popular. Evaluate for yourself whether a cash-in refinance is best for you.
