I agree that if borrowers are bringing money to close when they’re way upside down, that’s a fools game.

But, there are still millions of homeowners with equity. And in some cases, bringing a few grand to close (or even $50k) to bring their balance down to a level where they can increase their equity, and drastically cut their cost of funds, can pencil out very well.

In fact, I’ve a scenario right now that goes like this:
$800k value (conservatively, probably $825k, but… I like to be conservative)
$665k 1st at 6% 5/1 ARM, p/i that has 2yrs until 1st adjustment
$80k fixed 2nd

By paying down the first balance to $625,500, we can do a no points no fees loan to 4.875%. That saves my client $800/mo.

Projecting forward to August of 2015, if he kept his current loan, his principal balance would be roughly $407k.

With the new loan, it’ll be roughly $375k, but, we have to add the $40k brought to close to that figure, so…he’s at $415k, compared to $407k balance if he did nothing. However, during the next 5yrs, that $800/mo savings totals $48k.

So, in 5yrs, he’s got more than his $40k back, AND cut his principal balance by $40k more than had he done nothing. Plus, my comparison assumes that his ARM will average 6% for 3yrs after the first adjustment. Although we could be in a low interest rate environment for a lot longer than people think, we could also hit the debt wall, and see rates rise pretty quickly in a 2-3yr horizon.

Now, in this case, the only rub is that they’re not sure they’ll be there for 5 years. They think so, but…that’s reason for pause.

And, this is an extreme example. Most of the people I’m working with, where it makes sense to pay down their existing balance a bit, are only off of an LTV mark by a few grand. In that case, it can indeed be a very cost-effective way to go.

You can’t go wrong with debt reduction (unless you’re way upside down). It’s a guaranteed return. You can’t get that type of return, particularly accounting for risk, in any other investment vehicle.