Everyone has heard of a cash out refinance. In the off chance you have not, a cash out refinance is one in which a homeowner refinances their existing mortgage in order to acquire additional cash to be used for whatever purpose the borrower desires. The additional cash a homeowner receives once the existing mortgage is paid off at closing in a cash out refinance is based on equity established in the home. Now, a new trend that is being seen in the mortgage industry has been coined a cash in refinance. What exactly is a cash in refinance?
A cash in refinance is a recent development in the mortgage industry due to the decline in property values. Instead of a borrower taking additional cash against the equity in their home like in a cash out refinance, borrowers are now bringing additional funds to the closing table to pay down loan amounts, thus reducing the loan-to-value (LTV). By no means is a cash in refinance a new concept. However, cash in refinances are quickly becoming the norm when they were previously extremely uncommon.
By bringing funds to the closing table in a cash in refinance, homeowners are able to reduce their LTV to avoid paying PMI (private mortgage insurance). Let’s face it, when property values were at their peak, homeowners refinanced in droves, borrowing against apparent boundless equity. In today’s housing market, that is clearly no longer the case. Nevertheless, while current mortgage rates have remained historically low, homeowners are making cash in refinances exceedingly more popular.
When property values began to plummet in 2007, the cash out at closing mentality concerning real estate holdings came crashing down shortly thereafter. No one was spared. In fact, real estate web site Zillow.com reported in January 2009 that the value of the White House was more than $23 million less than it was one year prior. The Federal Reserve estimated that homeowners lost approximately $7 trillion in equity in their homes between the beginning of 2005 and end of the third quarter of 2009.
To put the recent cash in trend into perspective, a 2006 analysis of all refinance transactions indicated that approximately 95 percent were cash out while a mere 5 percent were cash in. By 2007, cash in refinance totals increased to 9%. By the end of 2009, cash in refinance totals skyrocketed to approximately 34 percent of all refinance transactions.
The decline in home values that have prompted the cash in refinance trend should not be all that surprising, though. Despite the decline in home values due to the recession, the Home Valuation Code of Conduct (HVCC) has also had a significant impact. The implementation of the HVCC now provides increased regularity in the appraisal process. As a result, the mortgage industry is witnessing increased integrity in actual home values. Gone are the days of mortgage brokers persuading appraisers to exaggerate a home’s value in order to make a mortgage loan work.
Although home values continue to appraise much less than a homeowner would like, a cash in refinance ultimately improves the equity position in a property when a homeowner brings additional cash to the closing table. By bringing additional cash to the closing table, the equity in the home is increased, resulting in a better mortgage rate. In addition, bringing cash to closing will make it easier for borrowers to qualify for a refinance mortgage. As mortgage lenders continually tighten their guidelines, the more equity a homeowner has in their property the better. I suspect before its all said and done, cash in refinances will overtake cash out refinances in terms of popularity.
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Peter
March 15, 2010 @ 10:47 am
HVCC has done nothing to maintain more accurate values.
Fraud has actually increased since it was implemented on May 1, 2009. Up 40% over the last year and up more than 100% from two years ago
see the study : http://www.interthinx.com/pdf/09_Q4MFRI_FNL.pdf
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Peter
March 15, 2010 @ 10:48 am
HVCC has done nothing to maintain more accurate values.
Fraud has actually increased since it was implemented on May 1, 2009. Up 40% over the last year and up more than 100% from two years ago
see the study : http://www.interthinx.com/pdf/09_Q4MFRI_FNL
Reply
Owl Tree
March 16, 2010 @ 10:11 am
The Home Valuation Code of conduct has been a complete failure. Instead of “appraisal independence”, it has been the reverse. Excellent, professional independent appraisers have been forced out of business, and are now completely dependent on discount handouts from giant appraisal management companies.
Speaking as someone with over 20 years in the mortgage industry, in a variety of responsibilities, I can say that HVCC is the worst change I’ve ever seen. Reputable appraisers, who spent years building up a professional client base, have been destroyed. Appraisal costs have skyrocketed because AMC’s demand a cut of the fee (which in my opinion is a blatant RESPA violation). And borrowers have been outraged when their newly renovated home is being compared to gutted foreclosures.
Ask any professional appraiser what they think of HVCC (that is, if you can find one that is still working).
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