When Does it Make Sense to Add Cash to My Refinance?
When does it pay to put cash into my mortgage? While everyone’s personal mortgage situation is different, those who meet one or more of the following criteria make for the best candidates when it comes to paying down their mortgage balance with cash:
If you have Personal Mortgage Insurance (PMI) already, adding cash to your refinance may help to remove the need to pay that extra premium. By paying down the balance on your mortgage and thereby lowering your loan-to-value (LTV) ratio under 80%, you could eliminate the PMI payments altogether. A new appraisal may be needed to determine the home's value at that point.
Cutting the Loan Term
Consumers looking to own their home free and clear as soon as they can will opt to add as much cash as possible. When you select a shorter loan term (i.e., going from a 30-year fixed to a 15-year fixed), the resulting higher monthly payments can be too much for the average homeowner. By paying down your mortgage balance you can reduce the loan amount and consequently reduce your monthly payments.
The most basic reason for wanting to add cash to a refinance is lowering monthly payments. For many, this is the only advantage of adding cash, but it may be a good one. Lowering these payments will allow you to take advantage of the savings over the long term. Those looking to do more with their money tomorrow may find the right move is adding cash to their refinance today.
Of course there are two sides to this coin. Those who are not planning on staying in their homes for a long time (more than 7 years) and have low credit scores should avoid adding cash to a refinance. Also remember that if you don’t have it, don’t spend it. Going into debt to pay off your mortgage sooner is never a good idea.