'Cash-in' refinancing lets underwater homeowners take advantage of low interest rates

Homeowners who owe so much on their mortgages that they can't refinance may want to consider bringing some money to the table to take advantage of today's near record-low interest rates.

That's what Frank Nothaft did. And he isn't alone. Millions of people in recent months have become part of a phenomenon known as "cash-in" refinancing.

"It's picked up dramatically," says Nothaft, chief economist at mortgage giant Freddie Mac, the government-chartered enterprise that purchases mortgages from lenders.

Typically, people refinance to "cash out" some of the equity they've built up in their homes over the years as a result of rising home values and paying down what they borrowed to buy the house. During housing's heyday, some folks became serial refinancers, turning in their old loans for new ones with almost every downtick in market rates and every new jump in their home's value.

The bubble burst, of course, and now many homeowners are upside down on their loans. They owe more than the current appraised value of their homes, so at first blush they would seem unable to benefit from mortgage rates that are bouncing somewhere around the 4.75% level for ultra-safe, 30-year fixed-rate mortgages.

Enter the cash-in refi. It's not a new concept, but it has "picked up dramatically" in the last six to nine months, Nothaft reports, to the point where cash-in refinancing is at its highest level since the mid-1980s when Freddie Mac began tracking the characteristics of refinance transactions.

In last year's fourth quarter, a third of all borrowers who refinanced lowered their principal balances by putting money into the deal rather than taking it out. The share dropped a bit in the first quarter, but the Freddie Mac economist expects the percentage to "remain elevated" for a number of reasons.

Certainly the chief driver of the cash-in craze is to earn a better return on your money. With savings accounts and other investments yielding little or nothing in profits these days, Nothaft thinks it makes sense to put some of your funds into your home, especially if you can knock a point or two off the mortgage rate.

"You'll get a much better return on your money by paying down" the amount you owe the bank, he says.

Even though she says she didn't realize there was a name for them, Amy Tierce, who heads one of the top-producing branches in Fairway Independent Mortgage's 90-office network, does cash-in refinances "all the time." And the Needham, Mass., loan officer points out there are other reasons to bring some money to the closing table.

One is to avoid the higher rate charged on high-balance loans. These so-called jumbo mortgages are typically priced about 1 percentage point higher than conventional loans. The cutoff between conventional and jumbo is $417,000 in most places, but as much as $729,750 in high-cost markets.

Tierce recently worked with a couple who wanted to refinance the jumbo loan on their second home in Brookline, Mass. Finding no product that would improve their situation — loans on vacation properties are difficult to find and expensive these days — she suggested that the couple do a cash-out refi on their principal residence and use that money to do a cash-in refi on their second house.

Now they have two loans "at absolute rock-bottom rates," Tierce says. "They rebalanced their debt, and the result was an overall savings north of $1,200 a month."

Another reason to consider moving your money into your mortgage is to get out of paying private mortgage insurance or avoiding PMI altogether.

Most lenders require mortgage insurance on loans with a loan-to-value ratio of 80% or more as a way to protect themselves against the possibility that the borrower fails to make his payments as promised. So, if you can get your balance under the 80% threshold, it sometimes makes sense to do so.

lsichelman@aol.com

Distributed by United Feature Syndicate.

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