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So, we’ve been hearing a lot about “cash-in” refinances lately, and because of the lack of understanding surrounding this topic (although our very own Clayton Closson did a good job of talking about cash-in refinancing recently), I have been COMPELLED to talk about the benefits of this option.

Not quite like my obsession with Twix bars, but close.

Here’s the skinny: a cash-in refinance is the opposite of a cash-out refinance.  It means you put money INTO the mortgage instead of taking money out.

“Why would anyone in their right mind do this?” is a common question I would get when helping people with their mortgage, and one I get today as a (self-titled) mortgage guru.

“If I had the money to pay down the mortgage, I wouldn’t be refinancing!”  On the surface, a good point.  But not necessarily when we dig deeper…

Let’s say you took out a $205,000 30-year fixed rate mortgage in 2006, with a mortgage rate of 6.25% (don’t laugh – that was an excellent rate back then.)  At that rate,  your payment is $1231 per month (not including taxes and insurance – I’m trying to keep this easy for y’all).

But now it’s 2012, and 6.25% is grating your nerves every time you hear at the water cooler about someone’s shiny, new 30-year fixed 3.875% rate.   I feel you – I’m the same way.

Let’s assume you still owe 186k. You set out to get yourself a shiny new 3.875% (on the remaining $186K you owe, with a 24-year term – you smartly picked the YOURgage, which allowed you to choose a 24-year fixed…nice).Your new payment is now $993.Very nice!

But unfortunately values have dropped because of the foreclosure next door (don’t get me started on that topic, thank you!).  Now your home appraises at $220K.  If you refinance the $186K you have left on your mortgage, you now have less than 20% equity in the home – which means (cue dramatic music) you would have to pay PMI.  You don’t like that and decide to scrap the whole thing and just resentfully continue paying your $1231, avoiding the water cooler, and blaming the world and political leaders on the unfairness of life.

But let’s not be hasty (this is where the smarts of a cash-in refinance come in) -– if you can pay your mortgage down by $10,000, PMI is no longer applicable. Take $10,000, pay down the mortgage to $176,000 and earn yourself a nice $939 payment on a 24-year loan.

You haven’t extended your term, you haven’t lost anything- in fact, you’ve now saved yourself over $84,000 in for the life of the loan!  Feel free to send flowers and Twix bars – I work at the Detroit office.

Now, I’m not saying everyone has $10K – I have a shoe addiction and a teenager, so I’m hard pressed to find an extra $10,000 lying around.  But if you do have it, in a savings account or money market or wherever you keep your cash, ask yourself this: “Am I earning $238 per month interest on that $10 grand?”

The answer is probably not.  My cash isn’t.  If yours isn’t either, check out your refinance options – and don’t let “cash-in” stop you.

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