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Trouble refinancing? Bring cash to the table

Cash-out refinancing has gone out of style. With mortgage financing so hard to come by these days and because so many homeowners have negative equity, the new mortgage trend is "cash-in" refinancing. With cash-out refinancing, you borrow more than required to pay off your current mortgage, and get a check for the difference. Your new loan balance is higher than your old one was.

Cash-in refinancing is the opposite: You borrow less than the current balance of your mortgage. Your new mortgage balance is therefore less than your old one. Find out why so many homeowners are opting to bring cash to the table when they refinance today.

Why a cash-in refinance?

According to Freddie Mac, one-third of all mortgage refinances are cash-in refis. Homeowners today have been frustrated seeing mortgage rates around 5 percent for 30-year loans and rates even lower for 15-year and hybrid ARM loans when they can't meet the criteria to refinance their mortgages. Being able to refinance to these historically-low rates could save them serious money, but falling home values, stubborn mortgage insurers and the lack of jumbo mortgages have created major stumbling blocks. For those who have the money, the answer is to bring in some cash to get a lower mortgage amount and lower interest rate.

Cash-in to offset fallen home values

In 2007, the median down payment percentage was 9 percent of the purchase price. Meanwhile, national housing values are down some 31 percent from 2007, and mortgage balances have only decreased about 2 percent over that same period. So Americans with mortgages are collectively looking at minus 20 percent home equity these days. How much does an underwater refinancing homeowner have to bring to the table? It depends: You can refinance to an FHA mortgage with 3.5 percent equity, and to a conventional mortgage with at least 10 percent. To avoid mortgage insurance (MI), however, you'll need 20 percent.

Here's an example. A home originally purchased for $200,000 with 10 percent down has lost 20 percent of its value and it now worth $160,000. The remaining mortgage balance is $175,000. To refinance, the homeowner can bring in:

  • $20,600 to refinance with an FHA loan ($15,000 to bring the balance down to the home's value, then an additional $5,600 to get the FHA loan amount to 96.5 percent of the home's value). With 10 percent down, you were probably paying mortgage insurance on the old loan, and you'll have monthly MI with an FHA mortgage too. But you also have an upfront mortgage insurance premium (MIP) of 1 percent, which can be financed if you choose.
  • $31,000 ($15,000 plus $160,000 * 10 percent) to get a conventional refinance with MI. Keep in mind that mortgage insurers have toughened up their guidelines; you may not qualify this time around even if you did when you got your last home loan.
  • $47,000 ($15,000 plus $160,000 * 20 percent) to get a refinance with no mortgage insurance.

Include the closing costs of refinancing (brokerage fees, early withdrawal penalties, etc.) when calculating the cost of your refinance.

Cash-in to dump mortgage insurance

Other homeowners choose to bring in cash when refinancing to dump their MI. How much can you save by doing this? If you bought a $200,000 home with 10 percent down, you could be paying (according to rate tables from one major insurer) .62 percent of your loan amount, (.0062 * $180,000) which is $1,116 a year or $93 a month. You might prefer to buy your loan down and save the MI costs.

Cash-in for jumbo mortgage borrowers

If you have a jumbo mortgage you may have jumbo problems. First, financing is harder to come by because Fannie Mae and Freddie Mac don't purchase these loans everywhere, and after the mortgage crisis began, no one else wanted jumbo loans either. Lenders usually have to hold them on their books, which impacts their cash flow. This lack of liquidity means jumbo mortgage rates are considerably higher than conforming mortgage rates. Jumbo mortgage rates average about .5 percent higher than conforming mortgage rates, about two and a half times the normal differential.

If you're a jumbo mortgage borrower and want to refinance at lower rates, you have a couple of choices. You can take out a first mortgage at the maximum conforming loan amount in your area; then you can take a second mortgage to cover the remaining balance of the loan, assuming you have enough home equity to allow this. You can bring cash when you refinance. Or you can try a combination of the two, bringing in cash to get the combined loan-to-value of the first plus second mortgages to 80 percent or less.

Other options

For those of you with Fannie Mae or Freddie Mac loans and little equity, a streamline refinance could enable you to refinance without bringing in cash to lower your loan amount.

HSH.com's Tri-Refi refinance calculator can help you figure out what's the best refinance option for you--bringing in extra cash, opting for an FHA loan, paying for mortgage insurance or doing nothing.

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