Home Equity Considerations
The primary factor that determines whether a homeowner must put cash into a refinance is the amount of equity the owner has in the home. Equity is the difference between the home's current value and the existing loan balance. In most cases, a lender will require the homeowner to have equity in the home of at least 5 percent. To avoid paying mortgage insurance to protect the lender, an equity level of 20 percent of the home's value is required.
For the homeowner who has equity in his home and wants refinance, the major cost is the closing cost to obtain a new loan. The Consumer's Guide to Mortgage Refinancing from the Federal Reserve Board notes that refinancing costs of 3 to 6 percent of the loan amount are typical. On a $200,000 loan, this is a cost of $6,000 to $12,000. A homeowner with sufficient equity in his home can elect to roll these costs into the new loan, reducing the out-of-pocket costs.
Streamline Refinance Options
Since the fall of home values after the real estate bubble of 2003 to 2006, lenders and government backed mortgage programs are offering streamline refinance programs to allow homeowners to refinance to lower rates with no or negative home equity programs. This type of refinance allows the homeowner to refinance the current loan amount without having the home appraised. The loan amount cannot be increased and the homeowner must pay all closing costs.
In February 2010, the Washington Post published an article discussing the increased interest in cash-in refinancing. This process is when homeowners refinance their home loans and pay a cash down payment to reduce the loan amount. A cash-in refinance may allow a homeowner with little equity in the home to obtain a low interest rate mortgage and save significantly on her house payment. Cash-in refinancing is for homeowners who understand their property values have fallen but the want to keep the home for the long term.