For many Charlotte area homeowners, a Cash-In Refinance may be a great financial move. Many Charlotte area homeowners spent the last decade doing Cash-Out Refinancing to take advantage of rising home prices and use the newfound house equity for other uses.
With today’s interest rates on both mortgages and savings accounts, a Cash-In Refinance can be a smart move to allow a homeowner to get rid of PMI, or pay off a higher interest rate second mortgage, or to simply get a lower mortgage payment.
A Cash-In Refinance is one where the homeowner will bring money to the closing in order to lower the Loan-to-Value (LTV) ratio. With a lower Loan-to-Value, a Charlotte homeowner will get a lower interest rate, lower or no PMI, and will not have a second mortgage.
Since most savings accounts, CD’s and Money Market accounts only pay about 0% to 1% interest, it doesn’t make much sense to keep more than a good emergency fund inside one of these accounts. After that, a Cash-In Refinance can have the same effect as earning 7-12% interest on your savings.
Here is an example to show how the math works to calculate the rate of return:
Four years ago, Charlotte homeowners bought a house for $300,000 and put 10% down. The homebuyers did a First and Second Mortgage for $240,000 and $30,000. The interest rates were 5.5% on the first and 7.5% on the second. The payments on these loans were $1,363 and $210 for a total of $1,573. After 4 years, the loan amounts are down to a total of $254,690, but the house is now only worth $275,000.
To get to 20% equity, the homeowners would need to have a new loan amount of $220,000 with this Cash-In Refinance. A new 30-year fixed-rate mortgage of $220,000 at 5% would result in a mortgage payment of only $1,181, which is $392 lower than the current mortgage payment.
How to make a guaranteed 13% on your savings!
If it cost you $35,000 to do this Cash-In Refinance (by paying down your loan amount by $35,000 to get to an 80% LTV), you would stop spending $392 per month on interest, or $4704 per year. This is the same as earning ($4704 / $35,000) 13.44% on your savings!
Put another way, if you put $35,000 into home equity, you still have that money, so you aren’t really spending it, you are just moving it from a savings account where it does nothing, into home equity to save on interest. Then, take the $394 per month and put it back into savings.
Is a Cash-In Refi right for you?
If you are a Charlotte homeowner with a mortgage interest rate over 5.5% and:
- you are paying PMI
- or you have a second mortgage
- and you have some savings sitting around doing nothing earning 1% or less
A Cash-In Refinance may be a great way for you to make a 10-13% return on your money.