Is It Time To Cash-In Rather Than Cash Out?

In 2006, when the mortgage boom was at its peak, approximately 90 percent of refinancing homeowners cashed out their home equity, increasing their mortgage balances. That option has steadily become less popular during the last seven years.

You can see the “deleveraging” trend in the latest figures from Freddie Mac. When refinancing most borrowers either keep the debt level they have or make it smaller. The urge to refinance and get cash from the property is now somewhat rare, only about 16% of those who refinance take out larger loans.

Lower Monthly Costs

In the last quarter, says Freddie Mac, “the average interest rate reduction was about 1.8 percentage points, or a savings of about 33 percent in interest rate, the largest percent reduction recorded in the 27 years of analysis.”

People are paying cash at closing to reduce their balances and pay less interest over time. This strategy is called "cash-in refinancing," and it's becoming very popular. In fact, the Freddie Mac's latest report indicates that 39 percent of refinances were cash-in loans. Combining cash-in with a lower refinance rate can increase both monthly cash flow and the amount of interest paid over the life of the loan.

For example, if you had a five-year-old $150,000 mortgage with a 5.3 percent mortgage rate, and you refinanced the remaining $138,319 balance (plus $2,766 in closing costs), you'd drop your mortgage payment from $833 a month to $634 a month, and pay $21,815 less over the life of your loan.* However, if you pay the closing costs at closing and add $10,000 cash-in, your new loan amount is $128,319, and your payment is $576.21. With this cash-in refinance, you pay $32,453 less interest over the life of the loan!

More Americans Lowering Debt Load

Figures from the Federal Reserve show that mortgage debt as a percentage of personal income is now down to levels that haven't been seen since 2001. Such a statistic reflects a general hunkering down, a mindful decision to cut monthly costs.

You can see the trend toward financial conservatism just by looking at credit card balances – Americans owed $850 billion in revolving debt at the end of December versus more than $1 trillion in 2008. In a similar sense, borrowers want to refinance mortgage obligations, and if less real estate debt is not doable, than at least with today's rates the same debt can be financed at a reduced cost.

* Refinance savings as calculated by the LendingTree Refinance Calculator, assuming loan costs of two percent, a 25 percent tax bracket, and that borrowers itemize tax deductions.

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