PARAMOUNT MORTGAGE - LENDER'S BLOG

(CNN MONEY) — At the height of the housing boom, millions of Americans treated their houses like ATMs, pulling out money through "cash-out" refis.

Today, with millions of mortgages underwater, money is flowing in the opposite direction.

It is no wonder "cash-in" refis accounted for 22% of all refinancing activity in the second quarter of this year.

Here are three cases where cash-ins can pay off — and three where they won't.

Put cash in to:

1.  Lower your mortgage rate: A loan-to-value (LTV) ratio “below 75% to 80% is what you’ll need,” says Freddie Mac chief economist Frank Nothaft. If you are close to that cutoff, then bring money to the table to push your LTV below that threshold to get the the best rates.

The same cash-in technique works for refis on a Jumbo loan ($417,000 for single-family homes). Toss in enough extra money to get out of a Jumbo and into a Conventional loan and you’ll save a half percentage point or more. This technique works on a home purchase too.

2.  Avoid PMI: With a loan-to-value ratio above 80%, homeowners are paying expensive private mortgage insurance to the average tune of $1,500 a year on a $300,000 loan. Reduce your LTV to 80% or below by adding additional cash and eliminate PMI. This also works for a purchase too.

3.  Pay off your mortgage faster: Putting cash in to limit the increase of your new payment when refinancing a 30-year loan into a 20-, 15-, or even 10-year mortgage is smart. Payments will be higher, but the interest savings can be huge over the life of the loan.

When to hold onto your money:

1.  Owning a home less than five years: Recouping your closing costs on a conventional refinance takes a couple of years. Adding cash into that same refinance will double your break even time, says Keith Gumbinger of HSH Associates.

2.  Your credit score isn't so great: With a low credit score you won’t qualify for a sub-5% rate on a 30-year fixed mortgage so a cash-in refinance will probably not pay off.

3.  You're strapped for cash: Don’t risk any of your present liquidity to orchestrate a refinance. If calamity strikes, you’ll need an emergency fund that will last six months, say experts.