What is a cash-in refinance?

A cash-in refinance is a straightforward strategy: you put down some cash upfront on your mortgage to reduce what you owe. It can help homeowners meet certain goals – lowering monthly payments, saying goodbye to private mortgage insurance, or qualifying for better loan terms or refinance rates. In this article, we'll walk you through how a cash-in refinance works and why it may be the right choice for your situation.

Key takeaways:

• A cash-in refinance can save you money by reducing your interest rate, eliminating PMI, or changing your loan term.
• This type of refinance has high upfront costs, including the one-time payment and closing costs.
• If a cash-in refinance isn’t the right fit, you can consider mortgage recasting or extra principal payments to reach your financial goals without changing your loan terms.

How cash-in refinancing works

A cash-in refi allows you to replace your current mortgage with a new one while paying a lump-sum amount to reduce your balance. The lump-sum payment acts like a new down payment that can help you lower the total amount you owe, reduce your mortgage interest rate, or cancel private mortgage insurance (PMI).

If you’re interested in a cash-in refinance¹, the process will look very similar to how you got your original mortgage.

First, you will submit a mortgage application. Your lender will review your finances to confirm that you qualify and can afford your new loan. You can expect to be asked to provide:

• Proof of income from pay stubs, W-2s, and income tax returns
• Your credit score
• Your debt-to-income ratio (DTI).
• Employment history
• Proof you have the funds available for the cash-in payment
• A property appraisal and title search

If your application is approved and you move forward, you’ll need to pay closing costs before the loan is finalized. These upfront fees typically total 2% - 5% of the new loan amount.

A cash-in refinance reduces your loan balance, which lowers your loan-to-value ratio (LTV) and decreases your monthly payment. Because you owe less money to your lender, this can help you secure a lower interest rate.

If you have an adjustable-rate mortgage (ARM), you can also use a cash-in refinance to switch to a predictable fixed-rate loan. You can also use this type of refinance to shorten your loan term and pay off your mortgage faster while paying less interest.

How much cash is required?

While there is no official minimum for a cash-out refinance, the more money you put into chipping away at your principal balance, the more you can reduce your monthly payment.

it can be beneficial to use enough cash to reach at least 20% equity in your home. This would allow you to cancel private mortgage insurance (PMI) on a conventional loan and lower your monthly payment even more.

If you don’t put in enough cash to significantly lower your payment or drop PMI, the closing costs you pay to refinance may outweigh the financial benefits of refinancing.

For example, imagine you owe $300,000 on a 30-year fixed loan at 6.5%. Your monthly principal and interest payment is roughly $1,896. If you bring $60,000 in cash to closing and lower your new loan balance to $240,000, you get a new 30-year term at 5.5%, and your new monthly payment drops to $1,362. That is a savings of $534 every single month.

Why should I pursue a cash-in refinance?

A cash-in refinance reduces the amount you owe and improves your LTV, opening the door to better interest rates and loan terms. Reducing your overall debt and interest rate can lower your monthly payment or allow you to pay off your mortgage sooner.

Here are some reasons borrowers may pursue a cash-in refinance:

• Eliminate private mortgage insurance payments
• Lower your interest rate
• Reduce your monthly payments
• Switch from an ARM to a fixed-rate mortgage
• Shorten your loan term from 30 to 15 years
• Extend your loan term with a new 30-year loan
• Improve your DTI
• Prepare for retirement by reducing your monthly housing expenses

Before doing a cash-in refinance, it’s important to calculate your break-even point by dividing your refinancing costs by the monthly savings. This will help you determine how long you’d need to stay in your home for the refinance to make financial sense.

When shouldn’t I pursue a cash-in refinance?

While there are benefits to a cash-in refinance, it may not be the right option for every homeowner. The biggest drawback is the significant upfront cost of refinancing. Even if you’re reducing your monthly payment, it will take time before you break even.

Cash-in refinancing also resets your loan term, which could extend your repayment timeline. Let’s say you’re halfway through your 30-year mortgage. Even if you secure lower monthly payments, you’ll still end up paying more interest over the life of the loan if you refinance to a new 30-year loan.

If you have limited emergency savings, a cash-in refinance may not be a worthwhile option. If putting cash toward your mortgage will leave you with less than 3 – 6 months of expenses in emergency savings, the risk may outweigh the benefit. A financial emergency could force you to borrow against your home equity at potentially higher rates, negating any gains.

Alternatives to cash-in refinancing

If a cash-in refinance doesn’t fit with your financial goals, here are some alternatives.

Mortgage recasting

Mortgage recasting allows you to make a large lump-sum payment toward your principal balance while keeping your existing loan terms and interest rate. Your lender recalculates your monthly payments based on the new balance, lowering your required monthly payment for the remaining loan term.

Mortgage recasting may be a suitable option if you want to lower your monthly payment without incurring the costs of refinancing. Unlike cash-in refinancing, recasting doesn’t require a loan application or credit check. Recasting typically requires a minimum payment of $10,000, and many lenders charge a servicing fee of a couple of hundred dollars – a small amount compared with closing costs.

Cash-out refinance

A cash-out refinance replaces your existing mortgage with a larger loan. You pay off your current loan and keep the difference in cash. You repay what you’ve borrowed as part of your new loan. Like cash-in refinancing, you’re replacing your current mortgage with a new loan, but you’re pulling money out instead of putting it in.

Cash-out refinancing is ideal for homeowners who want to borrow from their home equity to pay for home improvements or consolidate debts. However, unlike cash-in refinancing, it adds to your total debt, which can also increase your monthly payment.

Home equity loans

A home equity loan² is a second mortgage that allows you to borrow your equity. Unlike a cash-out refinance, a home equity loan is separate from your primary mortgage and leaves your original loan terms unchanged. The home is used as collateral to secure the loan, which can get you a better interest rate than other types of unsecured loans. However, you’ll need to be able to afford a second mortgage payment each month or risk losing the home to foreclosure.

There are two types of second mortgages you can choose from: a traditional home equity loan and a home equity line of credit (HELOC). A home equity loan comes with fixed interest rates and predictable monthly payments. A HELOC is a revolving line of credit you can draw from as needed and usually comes with variable interest rates.

A home equity loan may be a suitable option for borrowers who wish to tap into their home equity without compromising their current interest rate. A HELOC provides the flexibility to borrow and repay only what you need.

Make biweekly or extra payments

Biweekly or extra payments can help you pay off your principal faster without a large upfront payment or refinancing.

If you pay half of a monthly payment biweekly, you’ll make 26 payments a year. That’s equivalent to 13 monthly payments. This strategy lets you pay off a 30-year mortgage in 25 years and save thousands in interest. Before getting started, check to see if your mortgage servicer charges a prepayment penalty for paying off your loan early.

The bottom line: A cash-in refinance may lower your mortgage payment

A cash-in refinance is a way to save you money by shrinking the amount you owe on your mortgage. By making a lump sum payment toward your principal balance, you can reduce what you owe, secure a better interest rate, drop costly mortgage insurance, and ultimately lower your monthly payment. However, because it requires parting with a large chunk of your liquid savings and paying upfront closing costs, you should always run the numbers and weigh it against alternatives like mortgage recasting.

If you have the cash on hand and are ready to lower your payments, you can start your application with Rocket Mortgage today!

¹ Refinancing may increase finance charges over the life of the loan.

² Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. Must meet qualification requirements. This is not a commitment to lend.