Cash-in refinancing pays down some principal on existing loan

Q. What is a cash-in refinancing?

A: Cash-in refinancing is a type of mortgage where you pay down some of the principal on your existing loan. It is usually done to lower the interest rate, save money, or avoid paying mortgage insurance.

Freddie Mac reports that in the third quarter of 2014, 72 percent of those who refinanced their first-lien mortgage maintained the same amount or lowered their principal balance by paying in additional money at the closing table.

Unlike during the housing bubble when homeowners refinanced to pull equity from their homes, most are now refinancing to save money by landing lower rates and moving to shorter terms. When doing that and adding in cash, a homeowner could save more than $100,000 in interest over the life of a loan.

The potential drawback with a cash-in refinance nowadays is that mortgage rates are already at historic lows. If you’re paying 4 percent on a mortgage, you may be better off investing your excess cash than locking it up in your house.

Also, once you put that cash back in your home, you can’t access it again without borrowing. You don’t want to scramble every last cent you have and raid your emergency fund to pay down the house when you’re already borrowing that money so cheaply. You need to be sure you can really spare the cash.

Nevertheless, if you’re nearing retirement, or if paying off your house as quickly as possible is part of your long term strategy, a cash-in refinance could be a smart move to save a fortune.

Q. So how does it work?

A: Let’s say you bought a $300,000 home in 2008 with a 30-year $240,000 mortgage at 6 percent. Your monthly principal and interest payment on that loan is $1,439.

Now, six years later, you’ve paid the mortgage down to about $222,000. Keep that mortgage and you’ll pay about $200,000 more in interest over the next 24 years.

You’ll already save a bundle by refinancing at today’s low rates but if you cut your term and throw in cash, you could save a six-figure sum.

If you land a 15-year loan at 3.2 percent and throw in $40,000 at closing, you’ll pay about $1,274 per month. But the biggest benefit is that by the time you pay off your house in 2029, you’ll have only paid $47,000 in interest.

That’s a savings of $150,000 over your original mortgage.

Cash-in refinance will cost you upfront but it could save a tremendous of money down the line.