Refinancing could put savings to better use

If you've got a stash of cash earning 1percent or less in certificates of deposit and money market accounts, there’s a way to get more out of your savings.

Pay down your home loan through a cash-in refinancing.

The combination of a lower mortgage rate and smaller balance could dramatically reduce your monthly payments and save you tens of thousands of dollars in interest costs.

Indeed, committing some cash to the deal might be the only way to qualify for a refinancing if you don't have enough equity to qualify for a new loan.

Lots of people have been doing cash-in refis recently.

According to Freddie Mac, nearly half of homeowners who refinanced in the last three months of 2011 paid down their balance at closing.

That’s the highest percentage since the big government-owned mortgage lender began tracking cash-in refis more than a quarter century ago.

Here’s an example of how cash-in refinancing works:

Let’s say you bought a $300,000 house in 2006 with a $240,000 mortgage carrying a 6.5 percent interest rate. Your monthly principal and interest payment on that loan is $1,517.

Six years later, the value of your home has since depreciated to $225,000, but you still owe about $220,000.

You're not underwater, which is where you owe more on your home than it is currently worth, but you're close. Too close to qualify for a conventional refinancing.

Most banks will refinance a home loan for no more than 80 percent of the home's current value -- or a maximum of $180,000 in this case.

To close the deal you'd have to come up with the difference to pay off the old loan, or about $40,000.

Is it worth it? Depending on your personal situation, that investment could pay you back many times over.

If you refinance into a new $180,000, 30-year, fixed-rate loan with a 4 percent interest rate, the principal and interest payment will be about $859, or some $658 less each month than you’re paying on your old mortgage.

It will take you about five years to recoup your $40,000 investment, not counting any closing costs you’ll have to pay.

But look how much you'll save over the life of the loan.

If you keep your original loan and don’t refinance, you’ll have to pay another $216,000 in interest until the loan is fully paid off in 2036.

If you do the cash-in refinancing, you'll pay $129,365 in interest.

By investing in a refi now, you’ll realize savings of more than $86,000 in interest over the next 30 years.

You’ll save even more by refinancing into a shorter-term, 15-year mortgage.

Interest rates on those loans are currently around 3.3 percent, so the monthly payment on a $180,000 loan would be $1,269, about $250 less than you’re paying in our example.

Plus, you’ll have the mortgage paid off in nine fewer years. Total interest savings: more than $167,000. Not a bad return on a $40,000 investment.

It’s critical that you meet the requirement of having 20 percent equity in your home.

Home equity reflects that portion of its value that belongs to you, not the lenders. (It's the current value of the home minus the remaining balance on all mortgages divided by the value times 100).

Even if you find a bank or mortgage company willing to refinance your loan with 5 percent or 10 percent equity, it will require you to buy private mortgage insurance, known as PMI, to protect the lender in case you default.

That can wipe out much, if not all, of the interest savings you may get by switching to a lower-rate mortgage.

You also need to be fairly certain that you will stay in your home for at least as long as it takes to earn back your cash-in investment, plus closing costs.

But if you meet those criteria, doing a cash-in refinancing may be one of the smartest investment decisions you can make.

Before you decide, read our 6 smart moves for refinancing now.

Then use our mortgage calculator to find out how much you could save through a cash-in refinancing.

You’ll need to know how much you owe on your current mortgage, your monthly payment and interest rate, the approximate value of your home, how much money you can expect to borrow on a new loan, and the approximate interest rate and maturity on the new loan.