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Low mortgage rates have a funny way of changing people's perspective. With Freddie Mac's published mortgage rates sub-4 percent, homeowners are doing what it takes to refinance into today's low mortgage rates -- even if it means bringing some cash to closing.
For the first time in history, nearly half of all refinancing households lowered their loan balance at the time of closing.
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If you've never heard of a cash-in mortgage, you're not alone. They were relatively rare until just a a few years ago. Cash-in mortgages are a specific type of refinance in which the homeowner voluntarily lowers his loan balance at the time of closing.
A cash-in mortgage is the opposite of cash-out mortgage.
Cash-in mortgages have been increasingly popular since the Federal Reserve's initial mortgage market intervention in late-2008. The Fed's $500 billion MBS pledge at that time placed mortgage rates into their current trajectory that lowered conforming rates to below 4 percent.
The drop in rates, however, coincided with an unprecedented drop in home values nationwide.
Homeowners who had put 20% equity down at the time of purchase and now wanted to refinance, because of falling values, found themselves subject to monthly PMI -- something they paid 20% down to specifically avoid.
This was before the HARP program, of course, so the only way for homeowners to refinance into low rates was to voluntarily pay down their respective loan balances so that the 20% equity ratio was maintained.
The farther rates fell, the more frequently this happened. It's no surprise, therefore, that with today's mortgage rates at all-time lows, 1 in 2 conforming refinances is a cash-in mortgage.
Beyond just "low mortgage rates", there are plenty of reasons to consider a cash-in refinance.
The first is that your mortgage rates is too high for your liking and paying down your mortgage is the only way to refinance.
There are a lot of homeowners -- especially ones with jumbo mortgages or in high-cost area such as Loudoun County, Virginia and Montgomery County, Maryland -- who are HARP-ineligible for any number of reasons and just want to take advantage of today's low rates.
Another reason is that, right now, your idle cash on the bank is exactly that -- idle. With the Federal Reserve holding the Fed Funds Rate near 0.000%, and with inflation below 2 percent on an annual basis, checking and savings accounts nationwide are yielding close to zero percent interest.
If you moved those dollars from your bank account to your mortgage balance, you would earn an immediate return on your dollar. Each dollar you knock from your mortgage balance is a dollar on which you won't pay interest for the next 30 years and that adds up to big savings.
At today's mortgage rates, no matter what your loan balance, if you do a cash-in refinance and lower your loan balance by just $1,000 at closing, you'll end up saving $1,718 over the life of your loan.
According to Freddie Mac, cash-in refinances soared to a record quarter last quarter on a combination of low mortgage rates, sagging home prices, and the cyclical nature of conforming loan refinancing.
As it turns out that the 4th quarter, historically, is the most popular quarter for cash-in refinances. It's not even close, either. In 10 of the last 11 years, the 4th quarter has been the most common period during which homeowners execute a cash-in refinance.
On a quarter-by-quarter basis, going back to 2000, cash-in refinances register as follows :
Therefore, we should expect cash-in refinance activity to dip this quarter just because of how mortgage refinance cycles work. However, there are other factors at play, too.
For one, the government has introduced -- or will introduce -- a slew of new mortgage programs meant to help underwater homeowners gain access to today's low mortgage rates. The most well-known of these programs is the HARP program, the mortgage for "underwater homeowners".
Loan programs like HARP remove the need for cash-in refinances entirely.
And, home values are rising. As home values rise, homeowners nationwide find themselves with additional home equity they thought would be lost forever. As home equity replaces itself, fewer homeowners will need to take the cash-in refinance as a means to avoid PMI -- they'll have 20% equity all on their own.
If you're thinking of doing a cash-in mortgage -- or have no choice because of an appraisal -- make sure you know your options first. There are alternatives to cash-in refinancing, including the government's revamped HARP program; the standard FHA refinance; and, for veterans of the military, the VA loan program.
Ultimately, the cash-in refinance may work best, but you'll want to see your rates and options first.
Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage. Email Dan ator click to get a free, no-obligation rate quote.
You can also find Dan on Twitter and Google+.
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