What is a 'Cash-In' refinance?
A cash-in refinance is basically when you pay down your existing mortgage to under a certain loan-to-value ratio in order to qualify for a mortgage refinance.
Loan-to-value (LTV) is simply a calculation by dividing your unpaid principal mortgage balance into the current value of the property. A cash-in refinance
may only make sense in markets where property values are stable or rising and interest rates are relatively low
To avoid PMI on conventional loans your LTV must be at 80% or lower. Fannie Mae guidelines on investment properties only allow financing on loans with loan-to-values of 75% or less.
To decide whether a cash-in refi makes sense, divide your total amount of new interest savings by the amount you need to contribute into the loan. That is the rate of return on your cash-in refi investment. However, you'll want to keep the home for at least that amount of time to break even. If you reverse the calculation previously mentioned you will be able to arrive at the number of years you should expect to hold the property. Depending on market conditions you could technically sell and recoup your cash-in investment.
Other factors to consider
- Alternative Investments
- Upcoming Expenses
- Reduced Tax Shield
- Net Worth Diversification
Regardless of your reasons for refinancing, my general rule of thumb is to refinance whenever you can reduce your overall percentage by 1% or more and/or it takes 48 months or less to recoup the refinance costs. The quicker the break even point the better obviously. If you have a mortgage large enough, the costs can often be rolled into the loan and you can start saving money from the first month forward. The longest duration is simply living in your property for at least the amount of time it takes to recoup the cost e.g. even if it takes 10 years, if you live in your house for 11 years you win, but by only one year.
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Not sure how long you will own the home? Maybe selling is the right answer?
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