UPDATED: Apr 4, 2023
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.
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.
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.
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.
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:
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:
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:
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.
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.
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.
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.
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®.
Home Buying - 9-Minute Read
Katie Ziraldo - Mar 6, 2023
Get answers to mortgage questions you may want to ask your lender and explore a few questions you should be able to answer yourself before buying a home.
Homeowner Tips - 8-Minute Read
Melissa Brock - Jun 2, 2024
Using your home equity can let you cover expenses and pay for large purchases. Learn whether a cash-out refinance or a home equity loan is right for you.
Homeowner Tips - 6-Minute Read
Erin Gobler - May 29, 2024