CASH-OUT refinancing, in which borrowers pull out equity from their homes to finance everything from vacations to sports cars, were all the rage during the housing boom.
Now, as the nation continues to endure the slow, painful correction of that boom, another trend may be emerging: cash-in refinancing. In this case, borrowers put extra money into a transaction to obtain cheaper loans and pay down debts.
According to Freddie Mac, the government-sponsored entity that, along with Fannie Mae, helps set lending standards, 22 percent of homeowners who refinanced their mortgages in the second quarter of this year paid additional money at the closing to lower their principal balance. That ties the record for the third-highest “cash-in” refinancing — set in the fourth quarter of 2002 — since Freddie Mac began recording such transactions in 1985. The highest level was in the fourth quarter of 2009, with 36 percent of refinancing homeowners cashing in.
Freddie Mac’s chief economist, Frank Nothaft, linked the change to low interest rates on cash-equivalent investments like certificates of deposit. Consumers are finding that they can save more money on monthly interest payments by paying down their mortgages than by leaving their cash in banks, which are offering meager interest rates.
Indeed, mortgage industry executives said they had heard borrowers express such motives when choosing a cash-in refinancing strategy. But they said borrowers were also looking to qualify for a cheaper loan. Often, the more equity they have in their homes, the easier it is for them to qualify for certain loans and for lower interest rates.
Michael Moskowitz, the chief executive of Equity Now, a lender based in Manhattan, said that over the past year he had seen more borrowers add money to their mortgage refinancings with the aim of lifting equity levels high enough to qualify for a lower monthly payment.
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