What Is A Cash-In Refinance And Should You Consider One?

When you come into a large amount of money – whether it be from a tax return, inheritance, work bonus or something else – you may decide to put it toward debt you’ve incurred. One way to do that is through a cash-in refinance, which is when you replace your current home loan with a smaller one after making a lump-sum payment.

Putting more cash in when refinancing your mortgage can have some serious benefits, such as lowering your monthly payment or helping you save money on interest. But it’s important to understand how a cash-in refinance works because it may not be the right choice for everyone.

What Is A Cash-In Refinance?

A cash-in refinance is a type of refinancing where a homeowner makes a lump-sum payment on their home loan. As a result, they replace their current mortgage with one that has a smaller principal balance. This is similar to a mortgage recast, where lenders agree to make changes to mortgage loan terms after the borrower makes a lump-sum payment.

What’s The Difference Between A Cash-In Refinance And A Mortgage Recast?

The difference between a mortgage recast and a cash-in refinance is that with a mortgage recast, you keep your current mortgage rate and term, and your lender simply accepts your cash payment, applies it to your principal balance and reamortizes the loan. A cash-in refinance, on the other hand, requires you to pay off your current loan and replace it with a new one.

Can You Put More Money Down When Refinancing?

In most cases, refinancing involves replacing your current home loan with a new mortgage for the same amount. But homeowners also have the option of putting down additional money to decrease their mortgage balance.

A common reason that someone may put more money down when refinancing is to meet their lender’s loan-to-value (LTV) requirements for refinancing. Often lenders require that homeowners have at least 20% equity in their homes before refinancing.

Suppose you had less than 20% equity but wanted to refinance to take advantage of low interest rates. In this situation, you could use a cash-in refinance, where you make a lump-sum payment to reach 20% equity.

Do You Need A Down Payment To Refinance?

There’s no requirement to make a down payment when you refinance, but you should expect to pay closing costs.

It’s important to note that while it is often possible to avoid paying closing costs upfront, this does not necessarily ensure that the costs are eliminated. Unless your lender waives them entirely, which is a rare circumstance, closing costs will be added on top of the loan balance or could even be offset by a higher interest rate, leading to higher long-term costs.

What’s The Difference Between A Cash-Out Refinance Closing And A Cash-In Refinance Closing?

Closing on a cash-in refinance is exactly the opposite of closing on a cash-out refinance. When you do a cash-in refinance, you bring a check to the closing table with your lump-sum payment. That amount reduces the balance of your new mortgage. In the case of a cash-out refinance, you take out a larger mortgage and leave the closing table with a check in hand.

With a cash-out refinance, homeowners borrow more money than they currently owe on their mortgage. Then, they receive the difference in cash. Cash-out refinances are often used for debt consolidation or financing home improvements.

The Pros Of A Cash-In Refinance

There are several good reasons that someone might consider a cash-in refinance, from qualifying for better loan terms to reducing your monthly payment. Cash-in refinances can allow you to:

1. Lower Your LTV Ratio And Potentially Qualify For A Better Interest Rate

When lenders set the interest rate on a mortgage, they consider the LTV, which is the percentage of your loan balance to the market value of the home. A smaller LTV indicates less risk for the lender. Because of the reduced risk, lenders often offer lower interest rates to homeowners with a lower LTV.

This consideration is especially important to homeowners with underwater mortgages, meaning they owe more than their property is worth. A cash-in refinance can help those borrowers build some equity in their home, making them eligible for refinancing and a better interest rate.

2. Get Rid Of Private Mortgage Insurance (PMI) Premiums From Monthly Mortgage Payments

Lenders usually charge PMI to borrowers to buy a home with less than 20% down. The PMI protects your lender in case you default on your loan. PMI is often 0.1% – 2% of the loan amount.

PMI usually falls off automatically once a property’s LTV reaches 78% or less. But another way to get rid of PMI is with a cash-in refinance, where you make a lump-sum payment to increase your equity in the home. As long as you have at least 20% equity with your new loan, you won’t pay PMI.

It’s important to note that if you have a loan insured by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA), this perk may not apply to you. The USDA’s Guarantee Fee isn’t cancellable. If you have FHA mortgage insurance, you’ll either pay it for the life of the loan or put down more than 10% at closing to have it removed in 11 years. To remove mortgage insurance on these loans, you can also refinance to a conventional mortgage.

3. Swap From An Adjustable-Rate Mortgage (ARM) To A Fixed-Rate Mortgage

A 15-year fixed-rate mortgage comes with several perks, including lower interest rates and lower lifetime interest payments. Unfortunately, because of the higher monthly payments, 15-year mortgages can be unaffordable for many people.

But with a cash-in refinance, you may be able to reduce your mortgage amount enough to trade in an ARM or a 30-year fixed-rate mortgage for a 15-year fixed-rate mortgage. Depending on the size of your loan, it could be a difference of tens of thousands of dollars – or even upwards of $100,000 – in interest.

4. Lower Your Monthly Mortgage Payments

Another perk of a cash-in refinance is that if you choose to stick with a longer mortgage term, you can reduce your monthly mortgage payment. As a result, you have more room in your monthly budget for other expenses.

Suppose you have a mortgage of $200,000 and an interest rate of 7%. On a 30-year fixed-rate mortgage, you would pay about $1,331 per month in principal and interest payments. If you did a cash-in refinance and made a lump-sum payment of $25,000, you would reduce your monthly payments to $1,164. You’ve saved more than $100 per month, and that’s with the same interest rate. You may be eligible to refinance at a lower rate, which would help you save even more.

5. Reduce Your Overall Debt Load

Among all the other benefits, a cash-in refinance can help you reduce your overall debt load. Some people may just want emotional freedom from debt. Others might want to reduce their mortgage balance to lower their debt-to-income ratio (DTI).

Reducing your total debt can be especially beneficial for those considering retiring early, since eliminating a large monthly payment will make retirement more achievable.

The Cons Of A Cash-In Refinance

While a cash-in refinance can have plenty of benefits, it’s likely not the right choice for everyone. It’s also important to consider the downsides when deciding whether you should pursue a cash-in refinance.

1. You’ll Incur Refinance Costs Like Application, Origination And Appraisal Fees

Refinancing your mortgage, just like taking out your initial mortgage, requires upfront closing costs. In most cases, you can expect to pay between 2% – 6% of your loan balance in closing costs. For someone who isn’t planning to stay in their home long, incurring those costs might not make sense.

To determine if refinancing is a good decision, calculate your break-even point by figuring out how many months it would take to recoup your upfront closing costs. If you don’t plan to stay in the home until at least that time, it may not make sense to refinance.

2. Your Funds Will Become Illiquid

Homeowners should be sure to have cash reserves in a highly liquid savings account to avoid becoming house poor in the case of a financial setback. If you can’t do a cash-in refinance without emptying your savings, it’s probably not the right choice for you.

3. You Might Miss Out On More Lucrative Opportunities Elsewhere

Making a large lump-sum payment toward your mortgage inevitably means you don’t have that money to use for something else. The money you use on a cash-in refinance could otherwise be used to pay down higher-interest debt or contribute to higher-earning investments.

4. You Could Run Afoul Of Your Mortgage’s Prepayment Clause

Some mortgages come with a prepayment penalty, which some lenders require if you pay your home loan off early. These fees also apply when you refinance. Many companies, including Rocket Mortgage^®, don't charge prepayment penalties. They’re also illegal on government-backed loans from the FHA, VA or USDA. But for borrowers, it’s important to read the fine print of your mortgage before doing a cash-in refinance.

Are There Alternatives To A Cash-In Refinance?

The main alternatives to a cash-in refinance include a cash-out refinance, a home equity loan, a home equity line of credit (HELOC), a mortgage recast or a switch in mortgage payment structure.

Cash-Out Refinance

With a cash-out refinance, as discussed above, you replace your existing mortgage with a larger one, pocketing the difference in cash. This may make sense for people who need to fund large expenses or are trying to consolidate their debt.

Home Equity Loan Or HELOC

Both HELOCs and home equity loans allow you to leverage your home’s equity in your favor. A home equity loan provides you with a lump sum and fixed payments, while a HELOC operates more like a credit card, with a flexible credit line and variable interest rates. While Rocket Mortgage offers home equity loans, we do not offer HELOCs at this time.

Mortgage Recast

Rather than starting fresh with a new loan, a mortgage recast simply allows you to reamortize your existing one to reduce your monthly payment. A mortgage recast generally requires a lump-sum payment of $5,000 or more. There’s often a fee associated with a recast, but it’s usually no more than a few hundred dollars, which is significantly less than the cost of a refinance.

Bimonthly Payments

Just switching from monthly payments to bimonthly payments will help you build up equity faster and pay off your mortgage more quickly without increasing the cost of your monthly payments. Why? Because you’ll be making 26 payments a year versus 12 monthly payments a year. In other words, you’ll be making the equivalent of one extra monthly payment per year.

Extra Payments

If your goal is simply to pay off your mortgage early, a cash-in refinance isn’t necessary. Instead, you can either make a single lump-sum payment on your mortgage or make recurring extra payments to chip away at your loan faster. Just be sure to let your lender know that the extra payment is to be applied to your principal.

As mentioned above, read the fine print of your mortgage to ensure this doesn’t trigger a prepayment penalty.

The Bottom Line

A cash-in refinance can be a great option for a homeowner who has recently come into a significant amount of money, such as from a tax refund or inheritance. It’s especially attractive for those hoping to reduce their mortgage interest rate or lower their monthly payments. But it’s not the only way to chip away at your mortgage, so it’s important to research your options before taking the next steps.

Considering a refinance? Start an application online today.