Many homeowners refinance to tap into their home equity and access cash. Another option is to put money in when refinancing. If you can afford it, doing so may help you save thousands of dollars in the long run.
How Can a Cash-in Refinance Save You Money?
With a cash-in refinance, you will pay a lump sum at closing to reduce your mortgage balance. Your loan-to-value (LTV) ratio is calculated by dividing your outstanding mortgage balance by your home’s current value. Lenders generally require an LTV ratio of 80% or less to refinance and get a lower interest rate. Reducing your LTV ratio may allow you to reduce your interest rate and save thousands of dollars over the remaining term of the mortgage.
If you put down less than 20% when you bought your house, you were probably required to purchase private mortgage insurance. If you refinance and apply a lump sum to your loan balance, you may be able to get above the 20% threshold, eliminate PMI and save thousands.
If you currently owe more on your house than it’s worth, a lender may not be willing to refinance your mortgage at all. If you pay a lump sum and eliminate negative equity, you may be able to refinance and lower your monthly payments going forward.
Is a Cash-in Refinance Right for You?
If you choose a cash-in refinance, you may have to pay tens of thousands of dollars. To figure out your breakeven point, divide the amount you would have to pay at closing by the amount you would save in interest charges each year. That will tell you how long it would take you to reach a point where the amount of money saved would equal the amount paid to refinance.
If you plan to stay in your home for more time than that, you may decide that the long-term benefits would be worth it. If, on the other hand, you think you might move before reaching the breakeven point, think twice about a cash-in refinance.
Figure out if paying down your mortgage balance and lowering your interest charges would be the best way to spend your money. Think about other expenses that may come up in the next few years. If your house will require major repairs, a car will need to be replaced, or you will have to cover some other major expense, forking over a large sum for a cash-in refinance could make it harder to cover those costs.
Consider how a cash-in refinance could affect your ability to meet your other long-term goals. You could save money on interest, but investing funds in a retirement account or saving for another goal might be a better option, especially if you aren’t sure how long you will live in your house, you haven’t saved much for retirement or you want to have easy access to funds.