MarketWatch reported today that “cash-in refinancing” is the new trend in which borrowers tap their home equity and, instead of putting it into their pockets, are putting that money into their mortgages, especially when they want to refinance. And with mortgage rates at record lows — 4.56% for 30-year fixed-rate mortgages and 4.03% for 15-year fixed-rate mortgages for the week ending July 22, according to Freddie Mac — people will reduce their debt significantly.

Many homeowners are resorting to paying down the mortgage instead of investing in CDs or stocks. CDs don’t have the same high yields as in years past and the stock market’s volatility have made many people bearish.

Some of the advantages of a cash-in refinance include:

● By using the extra cash, borrowers would no longer have to pay private-mortgage insurance (PMI), which is required when the mortgage is more than 80% of the home’s value. The extra money would allow borrowers to eliminate PMI, thereby saving monthly premium costs.

● Borrowers can use the extra money to help them get the lowest rates possible, provided the loan-to-value ratio is less than 60% and the borrower has a FICO score above 740.

● The extra money brings the homeowner’s mortgage under the conforming loan limit so they do not have to pay higher jumbo rates. The money can also help homeowners reduce their mortgage term from 30 to 15 years to make their monthly payments more bearable.

According to Freddie Mac, 18% of all refinanced mortgages in the first quarter of 2010 were cash-in refinances — less than half of what it was in the previous quarter. However, many underwater homeowners may consider a cash-in refinance if they can find no-cost refinancing or get help from the government’s Home Affordable Refinance Program (HARP), despite being short on home equity.

HARP initially had a goal of helping around four to five million homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance and lower their monthly mortgage payments. According to the Treasury Department, so far, the program has helped around 220,000 homeowners. 

While banks usually require homeowners to have at least 20% equity to qualify for refinancing, this proved to be a problem during the current crisis, where homeowners have been faced with falling home prices. HARP was created to help these borrowers whose home values have fallen and who owe more than their homes are worth by taking advantage of the lower mortgage rates and refinancing their homes. 

Earlier, the program targeted borrowers who owe slightly more than their property values. Later, it was expanded to include those with loan balances of up to 25% more than their home values. 

So far, the program has struggled to meet its goals. The program is limited in reach since it only includes loans backed by the federal mortgage agencies, Fannie Mae and Freddie Mac. Homeowners with second mortgages or private mortgage insurance cannot qualify for refinancing and very often, the closing costs and refinancing expenses are not worth the lower interest rates.

HARP allows homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance and lower their monthly mortgage payments. While banks usually require homeowners to have at least 20% equity to qualify for refinancing, this proved to be a problem during the current crisis, where homeowners have been faced with falling home prices. Under HARP, which expires on June 10, 2010, homeowners are given access to low-cost refinancing to help them get out of adjustable-rate mortgages and into more affordable and stable loans.

To be eligible for refinancing under HARP:

a)      The existing mortgage loan should be owned or guaranteed by Fannie Mae or Freddie Mac.

b)      At the time of applying, the homeowner must be current on his or her mortgage payments. Homeowners are not considered “current” if they are late on mortgage payments by over 30 days or missed a payment in the past 12 months.

c)      The amount homeowners owe on their first lien mortgage should not exceed 125 percent of the current market value of their property.

d)      You must own or occupy a home between one to four units. This includes those who own and occupy a property that is a single-family home, condo, duplex, triplex or four-unit house.

e)      Homeowners should have a reasonable ability to pay the new mortgage payments.

f)        Refinancing improves long-term affordability or stability of a homeowners’ loan. This is determined by the lender when you submit a loan application. The lender will provide a “Good Faith Estimate” and a “Truth In Lending Statement” that includes your new interest rate, mortgage payment, closing fees and the amount you will pay over the life of the loan. To determine if refinancing improves long-term affordability, compare this with your current loan terms. If it is not an improvement, then refinancing may not be the right option.