Cash-in Refis Jump as Mortgage Rates Remain Low

Rewind just a few years, and the tactic of homeowners paying ahead on their mortgage was a rare occurrence. After all, home values were soaring and many people were using their home as their personal piggy bank. But we all know how that ended.

The 2008 housing collapse led to a steep decline in home values that caused mortgage rates to also fall of a cliff. Today people are becoming more prudent with their mortgages, which has ushered in a new trend: cashing-in or putting more cash into their mortgage balance.

“People are now looking to reduce the amount of debt and increase the equity in their home,” says Bob Walters, chief economist at Quicken Loans.  “There’s different behavior on the part of the home owner.”

More homeowners are bringing more cash to closing when engaging in a refinance.

According to Freddie Mac, the government-backed mortgage company, in the fourth quarter of 2011, 85% of homeowners who refinanced their first-lien mortgage either maintained roughly the same loan amount or lowered their principal by paying-in additional money at closing. Of the 85%, 49% of refinancing homeowners reduced their principal balance--the highest rate of cashing-in in the 26-year history of the analysis.

Cash-out borrowers, or those that increased their loan balance by 5% or more, accounted for 15% of all refinance loans in the fourth quarter, also marking the lowest percentage in 26 years. According to Freddie Mac, the average cash-out share from 1985 to 2010 was 46%.

Homeowners’ reasoning for cashing-in instead of cashing-out varies. Some want to end paying mortgage insurance while others think it’s a better use of the money that’s sitting in a savings account garnering little interest.

“A lot of folks got ‘X’ amount of dollars in a savings account that’s not paying anything,” says Walters. “It’s a great way to earn risk free yields.

Some want to get into a different mortgage program that requires a lower loan to value, and soon-to-be retirees don’t want to worry about paying a mortgage in their golden years.

Let’s say you have $100,000 sitting in your savings account: your home is worth $200,000 and you owe $225,000 on your mortgage. If you left the $100,000 in savings, it’s not earning much (if any) interest, and you’re still paying 6% on your mortgage. If you took $30,000 and put it toward a refinanced mortgage with a  rate of around  4% will not only lower your mortgage balance, but you are saving on the whole amount because the interest rate is also reduced.

Cashing-in doesn’t make sense if you are looking to move in a few years because you may not get it back when it comes time to sell your house.

Homeowners who won’t have adequate savings after putting more cash into their mortgage payments should also hold off. “Never use money you can’t easily do without,” says Walters, noting that cashing-in isn’t for people that are living pay check to pay check or are struggling even though they may have money in a savings account.

As for financial advisors who advise taking extra money and putting it into the stock market instead, Walters says whether to invest it or put it toward the mortgage is a personal choice based on what you are trying to accomplish. If you are nearing retirement, you may prefer the peace of mind of knowing you own your home outright. If you are just starting out, making money in the stock market may be more important than paying off your mortgage quicker.

“There’s no right or wrong,” says Walters. It comes down to your risk tolerance, he says.