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'Cash-in' refinance activity skyrockets

HARP refi » 'Cash-in' refinance activity skyrockets

The cash-out refinance is going out of fashion. Now the "cash-in" refinance is in vogue.

You've heard of the cash-out refi. That's when the new mortgage is for a bigger amount than the old loan. The homeowner receives a check for the difference at closing.

In a cash-in refi, the refinanced mortgage is for a smaller amount than the old loan. The homeowner takes a check to the closing.

"We are seeing people bringing cash to close because of low appraisals," says John Walsh, president of Total Mortgage Services of Milford, Conn. "That's really what's the eye opener to me, people repositioning their money in order to qualify for these still phenomenal rates."

Cash-in refinances
"Cash-in" refinances make up a growing percentage of Freddie-Mac-owned refinancings.
Source: Freddie Mac

Like Crocs footwear, cash-out refinancing peaked in popularity in 2006 and has faded since then. Cash-in refinancing picked up steadily last year. In the final three months of 2009, cash-ins accounted for one-third of refinances of Freddie Mac-owned loans, and cash-ins outnumbered cash-outs.

Homeowners do cash-in refinances for two main reasons: to avoid mortgage insurance and to avoid jumbo limits. In either case, they save money.

Cash-in math

Lenders typically require private mortgage insurance on loans for more than 80 percent of the home's assessed value. Oftentimes, a refinance is not worthwhile if mortgage insurance is required. Falling home values can squeeze borrowers past that threshold when they refinance.

Take, for example, someone who bought a $100,000 house a few years ago. The bust hit, and now the house is appraised at $80,000. To avoid mortgage insurance, the refinanced loan can't be for more than $64,000. That's 80 percent of the home's current value of $80,000. If the borrower owes more than $64,000, she'll have to go to the closing table with a check for the difference or pay PMI.

Falling home values are "our No. 1 reason for people not closing on a loan," Walsh says. "But there is an option for them. The option is that they're bringing money to the table to lower the loan amount in order to get the loan-to-value under 80 percent."

He sells the notion to customers this way: "Rather than having it in a money market at 1 percent, if you come to the table with $10,000 to pay down your mortgage, that's $10,000 that you're not paying 4-7/8 percent on."

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Seldom a first choice

People seldom start out with the intention of doing a cash-in refi, says Jim Sahnger, mortgage consultant for Palm Beach Financial Network in Stuart, Fla.

"It's not like you have people wake up and say, 'Oh, I'm going to put four to six grand in my mortgage today,'" he says. "They think they're going to be fine to do a rate-and-term refi, only to find out that when the value comes in, they're going to have to put money into it in order to capture a better rate."

On the upper end of the market, people take a check to closing so they can avoid higher rates on jumbo mortgages, says David Adamo, president of Luxury Mortgage, based in Stamford, Conn.

A jumbo mortgage is a home loan for more than $729,750. Adamo brings up a hypothetical example of someone who owes $775,000 and can knock the rate down by reducing the loan amount to $729,750 or less.

"You're going to do everything you can to do that," he says. In this case, the borrower would come to closing with a check for about $50,000.

The lowest mortgage rates are for people who get conforming loans, which have a maximum loan amount of $417,000.

"So if you have a $430,000 loan, you're going to do a cash-in refi for $417,000," Adamo says.

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