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

Refinancing your mortgage can be an excellent opportunity to lower your interest rate, lower your monthly payment, and save money over the life of your loan. And in the case of a cash-in refinance, you can make even more progress toward paying off your loan.

A cash-in refinance can be a great tool if you come into a large sum of money and want to put it toward your mortgage. Keep reading to learn more about how these loans work and whether one might be right for you.

What Is A Cash-In Refinance?

A cash-in refinance is a type of refinance loan that allows you as the borrower to make a lump-sum payment to lower your balance. In a normal refinance, you typically take out a new loan in the same amount as your existing mortgage.

But in the case of a cash-in refinance, you take out a new loan in an amount of less than your original mortgage. Then, you pay down a significant portion of the remaining balance on your original loan. Cash-in refinance loans come with plenty of advantages, including a lower monthly payment, more home equity and an easier time qualifying for a loan.

How A Cash-In Refinance Differs From A Cash-Out Refinance

A cash-out refinance is a popular type of refinance loan that allows you to borrow from the equity in your home. When you do a cash-out refinance, you take out a new loan that’s larger than your original mortgage. Part of the refinance loan goes to pay off your existing mortgage, while the rest is given to you in cash.

This type of loan reduces your home equity but also gives you money to use for any purpose, including home renovations or debt consolidation. This type of refinance is most attractive when interest rates are low.

Cash-in and cash-out refinances are entirely opposite. One type of loan involves putting additional equity into your home by making a lump-sum payment when you refinance your loan. The other loan type involves pulling equity from your home in the form of cash.

Do You Need A Down Payment To Refinance?

The process of refinancing your loan is a bit different from borrowing your initial mortgage. Normally, when you take out a loan to buy a home, you must provide a down payment as a percentage of your home’s purchase price. Down payments must usually be at least 3% of the purchase price – depending on your loan - but many people choose to put down more.

In the case of a refinance loan, no down payment is necessary. Instead, you must have a certain amount of equity in the home to refinance, and the equity you’ve already built up essentially serves as your down payment on the new loan.

The process for a cash-in refinance is a bit different from other refinance loans. With this type of loan, you’re taking out a smaller amount to have more equity in the home. As a result, you must make a payment — which is essentially a down payment — to pay down your existing mortgage to be able to borrow a lower amount.

Why A Cash-In Refinance May Be A Good Choice

Cash-in refinancing comes with plenty of benefits, especially when compared to your other mortgage refinancing options. Here are just a few of the perks of these loans:

• Helps borrowers build home equity faster: The lump-sum payment you make when you borrow a cash-in refinance immediately increases your home equity. Not only is your new mortgage smaller, but you own a greater percentage of your home.
• May make qualifying for a mortgage refinance easier: For you to qualify for a mortgage, you’ll need a debt-to-income ratio (DTI) that meets the lender’s requirements. A cash-in refinance lowers your monthly payment, meaning it reduces your DTI and makes it easier to qualify for a refi or other kind of loan in the future.
• Lowers your LTV to make it easier to refinance: Most lenders require that you have a certain amount of equity built up in your home before you can refinance. If you haven’t quite met the required loan-to-value ratio (LTV), a cash-in refinance can give you the extra home equity boost to help you get there.
• May help homeowners lock in a lower monthly payment: When you do a cash-in refinance, you’re borrowing a lower balance. As a result, you may end up with a lower monthly payment. The exception would be if you get a loan with a higher interest rate or shorter loan term.
• Allows borrowers to switch to a new loan type: Most borrowers choose a 30-year loan to make their monthly payments more affordable. But in the case of a cash-in refinance, you’re borrowing a lower amount. As a result, you may be able to switch to a shorter loan term that allows you to pay off your mortgage more quickly. Of course, you’ll also have the option of extending your loan to a 30-year loan, which could significantly lower your monthly payments.
• Helps you get rid of PMI: Private mortgage insurance (PMI) is an extra fee that borrowers must pay each month if they buy a home with less than 20% down. If you still don’t have 20% equity in your home when you refinance, a cash-in refinance can help you increase your home equity and remove PMI from your loan.

Why A Cash-In Refinance May Not Be The Right Fit

Cash-in refinances have plenty of benefits, but they aren’t right for everyone. Here are a few reasons why a cash-in refinance might not be the best fit:

• Requires a lot of money upfront: A cash-in refinance requires making a lump-sum payment toward your new loan. Unfortunately, not everyone has the money to do that. And even borrowers who can afford the large payment may prefer to use it for another purpose.
• Still have to pay closing costs on the loan: If you make a lump-sum payment toward your loan for a cash-in refinance, it won’t be your only cost. Like other refinance loans, a cash-in refinance still requires closing costs, which will require you to have even more money on hand.
• May end up with a higher interest rate depending on the existing mortgage: Market interest rates change, and the rates that are available when you refinance your loan may be higher than when you initially borrowed the loan. As a result, you could end up with a higher interest rate on the remainder of your loan, which could increase your monthly payments.
• Borrowers won’t have access to those funds: Having a lot of equity in your home is great, but it’s also highly illiquid. Once that money is tied up in your home, you can’t use it for any other purpose, and it’s difficult to access in case you need it later. If you have to empty your emergency fund or other savings to do a cash-in refinance, it may not be the best option at this time.

Alternatives To A Cash-In Refinance

A cash-in refinance is one way to pay off your mortgage more quickly, but it’s not your only option. Here are a few alternatives:

Mortgage Recast

A mortgage recast entails making make a lump sum payment toward your principal balance and your lender re-amortizing your loan based on the new balance. It’s similar to a refinance in that you pay down your mortgage balance, which lowers your monthly payment. But unlike a refinance, a mortgage recast allows you to keep your current mortgage terms.

A mortgage recast, like a cash-in refinance, allows you to make a lump-sum payment on your loan to lower your balance and monthly payments even more.

Paying More Toward Your Principal

There’s nothing that says you must refinance or recast your loan to lower your balance. Instead, you can choose to pay more toward your principal, which will also effectively lower your balance.

If you’re planning to make a principal payment on your loan, you should contact your lender and let them know of your plan. That way, they’ll apply the payment to your principal immediately rather than putting it toward future principal and interest payments.

Making More Than One Monthly Payment

Most borrowers make just one monthly payment on their mortgage for the minimum payment amount. But you can pay off your loan more quickly by making additional payments. Not only will this help you pay down your loan more aggressively, but it will also help you save on interest.

There are a couple of different ways you can make more than one monthly payment. First, you can make biweekly mortgage payments. Instead of making your full mortgage payment once per month, you’ll make half your mortgage payment every 2 weeks. And in certain months, you’ll end up making three mortgage payments. With this method, you’ll actually make 13 full payments instead of 12 every year – that’s one extra mortgage payment annually.

Another way to make more than one monthly payment is to simply split your payment in two and pick two set dates each month to pay it. This strategy will result in making your normal payment each month, but in two installment payments.

Finally, if you want to pay more than your normal mortgage payment, you can make your normal payment, as well as more payments in whatever amount you’re comfortable with whenever you have the extra money.

Should You Apply For A Cash-In Refinance?

Whether you should apply for a cash-in refinance depends on your financial situation. A cash-in refinance can be a great option if you want to lower your monthly payment, have enough money on hand to make a lump-sum payment on your loan and will still have an emergency fund or other savings afterward.

However, if you can’t afford a large lump-sum payment or would rather use that money for another purpose, a cash-in refinance probably isn’t worth it. Another reason to reconsider a cash-in refinance is if you have a low interest rate. If a cash-in refinance would result in you having a mortgage with a higher interest rate, other options like a mortgage recast or extra principal payments could be more effective.

The Bottom Line

A cash-in refinance is an excellent option to help homeowners increase their home equity and lower their mortgage balance and monthly payments. However, it’s just one of the many options available to homeowners looking to refinance their loans. You may also want to consider a traditional refinance or a cash-out refinance, especially if you have other financial goals you want to prioritize. If you're interested in a refinance, apply online with Rocket Mortgage^®.