There are several good reasons that someone might consider a cash-in refinance, from qualifying for better loan terms to reducing your monthly payment. When lenders set the interest rate on a mortgage, they consider the loan-to-value ratio (LTV), which is the percentage of your loan balance to the market value of the home. The smaller the LTV, the better because it represents less risk for the lender. And because of the reduced risk, lenders often offer lower interest rates to homeowners with a lower LTV. This consideration is especially important to homeowners with underwater mortgages, meaning they owe more than their property is worth. A cash-in refinance can help those borrowers build some equity in their home, making them eligible for refinancing and a better interest rate.You’ll Lower Your LTV Ratio And Might Qualify For A Better Interest Rate
You Might Get Rid Of PMI Payments
Lenders usually charge private mortgage insurance (PMI) to borrowers to buy a home with less than 20% down. The PMI protects your lender in case you default on your loan. PMI is often 0.1 – 2% of the loan amount.
PMI usually falls off automatically once a property’s LTV reaches 78% or less. But another way to get rid of PMI is with a cash-in refinance, where you make a lump-sum payment to increase your equity in the home. As long as you have at least 20% equity with your new loan, you won’t pay PMI.
It’s important to note that if you have a loan insured by the FHA, VA, or USDA, this perk may not apply to you. The FHA’s mortgage insurance, the VA’s Funding Fee and the USDA’s Guarantee Fee aren’t cancellable, meaning you’ll need to refinance to a conventional mortgage to eliminate them.
You Might Be Able To Afford A 15-Year Fixed-Rate Mortgage
A 15-year fixed-rate mortgage comes with several perks, including lower interest rates and lower lifetime interest payments. Unfortunately, because of the higher monthly payments, 15-year mortgages are unaffordable for many people.
But with a cash-in refinance, you may be able to reduce your mortgage amount enough to trade in an adjustable-rate mortgage or a 30-year fixed-rate mortgage for a 15-year fixed-rate mortgage. Depending on the size of your loan, it could make the difference of tens of thousands of dollars – or even upwards of $100,000 – in interest.
You’ll Lower Your Monthly Mortgage Payments
Another perk of a cash-in refinance is that if you choose to stick with a longer mortgage term, you can reduce your monthly mortgage payment. As a result, you have more room in your monthly budget for other expenses.
Suppose you have a mortgage of $200,000 and an interest rate of 3%. On a 30-year fixed-rate mortgage, you would pay about $843 per month in principal and interest payments. If you did a cash-in refinance and made a lump-sum payment of $25,000, you would reduce your monthly payments to $737. You’ve saved more than $100 per month, and that’s with the same interest rate. You may be eligible to refinance at a lower rate, which would help you save even more.
You’ll Reduce Your Overall Debt Load
Among all the other benefits, a cash-in refinance can help you to reduce your overall debt load. Some people may just want emotional freedom from debt. Others might want to reduce their mortgage balance to lower their debt-to-income ratio.
Reducing your total debt can be especially beneficial for those considering retiring early, since eliminating a large monthly payment will make retirement more achievable.
