More homeowners seek cash-in refinancing

07/30/2010
A new report may indicate the increasing popularity of cash-in mortgage refinancing.

The number of homeowners who provided additional money upfront when they refinanced their mortgage climbed to 22 percent in the second quarter, reported government mortgage-backing giant Freddie Mac. That figure was up from the first quarter, when 19 percent of homeowners chipped in more cash at the closing table. It also tied the record for the third-highest percentage of homeowners who used the cash-in refinancing method since Freddie began tracking such data in 1985.

Indeed, cash-in refinancing is catching on among homeowners who wish to knock down their principal mortgage amount in the interest of lowering their loan term. These consumers are using record-low mortgage rates as an opportunity not just to pay less on their monthly payments, but also to pay for a shorter amount of time, Anthony Hsieh, CEO of an online direct lender, told MarketWatch. "Consumers are a lot more conservative now. They're utilizing their cash now to invest into their mortgage ... they're not using it to buy boats or RVs or taking large vacations."

There are additional benefits to cashing in, said MarketWatch. The extra funds can lower one's mortgage from jumbo to conforming status, providing even more interest rate relief. A borrower would also be reducing their loan-to-home value ratio. If they can reduce their mortgage amount to less than 60 percent of their home value and have a credit score of at least 740, they may qualify for the lowest possible interest rates.

In today's market, pouring money into one's mortgage is a preferable option compared to stock trading, said Freddie Mac's chief economist, Frank Nothaft. "If you pay down your mortgage balance you save the interest you would pay on the loan ... versus earning a percentage point or less in CDs and money markets and without the riskiness of stock market investments, which have not performed well."

Back when home values were on the rise, cash-out refinancing was much more popular. That process involved homeowners turning part of their home equity into cash. Today, cash-out transactions represent 27 percent of refinancing activity, its lowest share ever, said Freddie Mac. In the second quarter, $8.3 billion in home equity was converted to cash, the lowest amount in 10 years.

Rates inched down again for the week ending July 29, with 30-year loans falling to 4.54 percent, reported Freddie Mac.