Is Cash Refinancing a Good Idea for You?
To lower your LTV so you can refinance
Increasing your equity in a cash refinance also decreases your loan-to-value ratio (LTV), increasing your flexibility to refinance in the future. You can think of LTV as the reverse of equity. If you have 20% equity in your home, your LTV is 80%.
LTV is important because most of the major loan options outside of VA loans require that you have at least 20% of the equity in your home after refinancing in order to withdraw money. While you are not looking to withdraw cash on a cash-out refinance, you may be looking to give yourself the option in the future by making a large payment now. Plus, if you’re buying a 3-4 unit property, you won’t need to have more than 75-80% LTV to refinance.
To shorten or lengthen the term of your loan
Another reason to refinance with cash is to shorten or lengthen the term of your loan. If you shorten the term of your loan, you get a lower rate than loans with longer terms because investors don’t have to project inflation that far. You also save thousands of dollars in interest by paying off your mortgage sooner.
On the other hand, going for a longer term mortgage means the possibility of having a lower monthly payment. The trade-off is a higher interest rate because the inflation is projected further. You also pay more interest by taking longer to pay off the mortgage. However, if you need the money you put in your house for other things, this is a good option.
Switching from an ARM to a Fixed Rate Mortgage
Variable Rate Mortgages (ARM) have the advantage of a lower interest rate compared to current market rates, as the adjustable nature means investors don’t have to guess where inflation will be, as it can always s’ adjust up or down after the teaser period. People might even enter ARMs because they plan to move before the adjustment occurs.
However, if you are staying in your home longer or if interest rates tend to rise as you adjust, consider a fixed rate mortgage. With a fixed rate, you would have payment security for the duration of the term. Refinancing in cash may make sense in this scenario.
Get rid of mortgage insurance
Both conventional and FHA loans have forms of mortgage insurance that you have to pay if you put less than 20% down when you buy your home. In fact, on FHA loans with an initial down payment of less than 10%, mortgage insurance remains valid for the duration of the loan. While this helps you afford to buy a home without using up all your savings, no one likes to pay extra monthly fees if it can be avoided.
By doing cash-in refinancing, you can increase your equity to a level of at least 20%. By refinancing yourself into a conventional loan, you can avoid future mortgage insurance payments on your home, assuming it is primary property.
To refinance from a jumbo loan to a compliant mortgage
You may be looking to refinance, but you currently have a jumbo loan and would like to take out a loan with regular conforming mortgage limits, ie $ 548,250 for a 1-unit property, for example. After all, the rates may be similar, but the requirements may be more stringent for jumbo loans. You can choose to do a cash refinance to go under the compliant mortgage limit.
To take a step towards a debt-free future
For some, a cash refinance can be seen as a stepping stone to paying off your mortgage faster. Many owners have a formal or informal goal of being get out of debt as soon as possible. By putting a lot of the change in their home and possibly shortening the term, they can pay off the mortgage much faster.