August 25, 2010 – In recent weeks, mortgage rates have hit a record low with the current 30 year fixed rate at 4.00% and the 15 year fixed rate at 3.50%. With many borrowers making the move to take advantage of these rates, the decision of how much to refinance has changed from the days of the housing boom when everyone was taking cash out of their homes. Today, borrowers are lowering their mortgage interest rates via the cash in refinance.
A cash in refinance is when a borrower brings money to the closing and, therefore, puts money into the transaction. These funds brought to closing must be documented with bank statements from the account that the funds were taken from. Borrowers need to know that all other normal underwriting guidelines still apply to these transactions.
According to the government sponsored entity, Freddie Mac, 22% of refinances made during the second quarter of this year have been cash in refinances with cash out refinances as their lowest level since 1985. As savings accounts, money market accounts and certificates of deposit have interest rate returns at their lowest since the 1930s, borrowers are choosing to invest their money into the equity of their homes instead of banks. As compared to several years ago when consumers were spending, today’s consumers have become more conservative and are interested in paying down their debt.
With housing values declining, many borrowers cannot qualify for a refinance unless they have more equity in their homes. As the past housing boom slowly corrects itself, the value of housing has plummeted leaving many home owners underwater in their mortgages. With these mortgages, a cash in refinance is the only option to take advantage of the current low interest rates. For many borrowers, bringing enough cash to increase their home equity to 20% will result in a lower interest rate and also the elimination of monthly private mortgage insurance premium payments. Since PMI rates have also increased for those without pristine credit, having to pay PMI could potentially disqualify some borrowers. With 30% home equity, the interest rate can possibly be even lower. Today’s stricter underwriting standards support loan to value ratios that should be at least between 75% to 80% in order to get the best rates. The less the loan to value together with good credit scores equals the lowest possible interest rate.
With housing values declining, many borrowers cannot qualify for a refinance unless they have more equity in their homes. As the past housing boom slowly corrects itself, the value of housing has plummeted leaving many home owners underwater in their mortgages. With these mortgages, a cash in refinance is the only option to take advantage of the current low interest rates. For many borrowers, bringing enough cash to increase their home equity to 20% will result in a lower interest rate and also the elimination of monthly private mortgage insurance premium payments. Since PMI rates have also increased for those without pristine credit, having to pay PMI could potentially disqualify some borrowers. With 30% home equity, the interest rate can possibly be even lower. Today’s stricter underwriting standards support loan to value ratios that should be at least between 75% to 80% in order to get the best rates. The less the loan to value together with good credit scores equals the lowest possible interest rate.
Some borrowers are bringing cash in to the refinance in order to avoid a jumbo mortgage which carries a higher rate. With the current interest rates at 50 years lows, some are refinancing with the intent to stay in their home for the long term. By doing a cash in refinance and reducing principal, many are finding that they are able to take a shorter term mortgage in an effort to pay down their loan as quickly as possible and, thereby, reducing their debt burden sooner. This has made the 15 year refinance very popular in today’s market. Over time, not only is the term shorter, but the overall interest paid over the life of the loan is greatly reduced.
As time goes on, housing will boom and bust while trends will come and go. Today’s trend of the cash in refinance will stay around as long as interest rates are low, housing prices are low and money is tight. With so much uncertainty in the economy, borrowers will continue lowering their mortgage interest rates via the cash in refinance in order to eliminate their debt as quickly as possible.
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