A cash-in refinance is when the new mortgage is smaller than the existing mortgage and the homeowner brings cash to the closing table. In contrast, a cash out refinance is where the old mortgage is less than the amount of the new mortgage and the borrower receives cash back. Freddie Mac has estimated that almost one third of its mortgages today are cash-in refinances.
The strategy is to make your mortgage work harder for you. Savvy borrowers are doing this to: 1) eliminate mortgage insurance, 2) avoid the higher rates on jumbo loans, or 3) a loan to value issue will not allow them to payoff the old loan in full.
Like any refinance, you and your mortgage professional should do the math. With a $300,000 mortgage, the pure interest rate savings would be about $275 per month. Do not look solely at the change in the monthly payment as you might be adding on to the life of the loan. I have seen my clients continue to make the same payment to payoff their mortgage faster, put the savings into retirement or savings accounts, or payoff those evil credit cards.
As always you should consider how long you intend to stay in the house to make sure you recapture any costs and still have adequate liquidity. Utilizing cash from a CD or savings account that is paying 1% to eliminate a much higher interest rate is a safe way to improve your financial situation.
