Is a Cash-In Refinance a Smart Idea?

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A cash-in refinance allows you to pay down your mortgage while improving its terms. It’s not the most common refinance type, but there are several reasons why someone might choose to bring cash to the refinance closing table. Sometimes, a lender could even require one to approve your loan.

What Is a Cash-In Refinance?

A cash-in refinance is when you refinance your mortgage and make a lump sum payment to reduce your total balance. This doesn’t mean just covering closing costs – a cash-in refinance involves paying down the loan balance, thereby increasing the equity in your home.

A cash-in refinance is the opposite of a cash-out refinance where you take cash at closing, reducing your home equity.

For most homeowners, it doesn’t make sense to do a cash-in refinance solely to pay down their loan. There are other, less costly alternatives for doing so.

But a cash-in could be a smart idea if you already have another reason to refinance, something like:

  • Reducing your interest rate
  • Changing from a 30-year fixed to a 15-year, or vice versa
  • Changing to a more favorable type of mortgage

Why You Might Choose to Do a Cash-In Refinance

If you have a considerable sum of cash on hand – this could be from savings or from a one-time windfall such as an inheritance, work bonus, or insurance settlement – it might make sense to pay down your loan as part of your refinance.

Reduce Your Monthly Payments

Doing a cash-in refinance to pay down your mortgage balance will help reduce your payments in nearly all cases. If you have cash on hand and want to alleviate some of the burden on your monthly budget, a cash-in refinance can help. 

This is particularly true if you can do a cash-in and reduce your interest rate simultaneously.

Qualify for a Lower Interest Rate

You know that your credit score is a major factor in the interest rate you receive from lenders. But are you aware that the amount of equity you have in your home also plays a significant role?

Doing a cash-in refinance allows you to reduce your loan-to-value (LTV) ratio, a measure of your equity, and can help you qualify for a lower interest rate compared to refinancing at your current LTV.

Eliminate Mortgage Insurance Payments

You’re probably paying for mortgage insurance if you have a conventional loan with less than 20% equity. If you have an FHA loan, you’re likely on the hook for mortgage insurance premiums regardless of how much you’ve paid toward your home. Either way, your monthly mortgage insurance cost could be hundreds of dollars. 

If you’re currently responsible for mortgage insurance and can do a cash-in conventional refinance that brings your equity up to 20% (an 80% LTV), you may be able to eliminate PMI or FHA mortgage insurance and cut your payments significantly.

Shorten Your Loan Term

You may not need a cash-in refinance to shorten your loan term, but it can certainly help make the payments more affordable. Shorter-term loans require larger payments even though the interest rate is often lower.

By doing a cash-in refinance at the same time as shortening your loan term, you can offset the impact of having fewer payments while still working towards paying your property off sooner.

For example: You are refinancing your $300,000 loan balance to either a 30-year loan at 7% or a 15-year loan at 6.5%. The principal and interest payments on the 30-year mortgage would be $1,996, while the 15-year would be $2,613. However, if you do a cash-in refinance and reduce your loan balance to $250,000, the 15-year P&I payments would drop to $2,178.

Can a Lender Require a Cash-In Refinance?

Sometimes, you might need to pay down your loan balance to be able to refinance. This occurs when you don’t have enough equity to meet the lender’s minimum requirements.

Suppose you purchased your home with a 3.5%-down FHA loan, and local property values have not risen since. In that case, you may not have the 5% equity needed for a conventional refinance. 

If not, a conventional lender could require you to do a cash-in to reduce your loan balance or wait to refinance until home prices have risen and you’ve gained enough equity organically. 

Of course, a big problem with waiting until your home value increases is that there is no way to predict what interest rates will be like in the future.

For example: You purchased your home for $300k with 3.5% down, and property values in your area have remained constant. You currently have a loan total of $289,500. A 95% LTV conventional refinance would max out at $285,000. This would require you to do a $4,500 cash-in to cover the difference and be able to close.

What if home prices have decreased in your area? If your home’s value has dropped by 5% and your property now appraises for $285,000, the maximum conventional refinance loan would be about $271,000. In this scenario, you could be required to do a $20k cash-in refinance.

Streamline Refinance: Antidote for Cash-In Refinancing

Do you currently have a government-backed mortgage through the FHA, VA, or USDA? If so, you may be able to do a streamline refinance and avoid having to put cash in at closing.

A streamline refinance is a low-doc refi loan with:

  • No detailed credit check
  • No verification of income
  • No appraisal required
  • No home value check

With a streamline refinance, the amount of equity you have in your home doesn’t matter. You can do a streamline refi to lower your rate without bringing extra cash to the table, even if you’re fully underwater on your loan.

Unfortunately, borrowers who have an existing conventional mortgage are not able to take advantage of this option. There are no current conventional streamline refinance programs. But if you have a government-secured loan, you should check out the:

Cash-In Refinance Vs Cash-Out Refinance

A cash-in refinance is widely considered the opposite of a cash-out refinance. However, they are similar in that they both require you to take out a new loan to pay off your existing mortgage. In most cases, this will result in adjusting your interest rate and the length of your payments.

The fundamental difference between these two types of loans has to do with your home’s equity. When you do a cash-out refinance, you convert your property’s built-up value into cash. As a result, the amount of equity in your home ends up lower than before.

With a cash-in refinance, you’re converting cash into home equity. After closing, you’ll owe less on your property, increasing equity, and be that much closer to owning it outright.

Cash-In Refinancing Alternatives To Reduce Your Loan Balance

We’ve covered a number of the benefits of a voluntary cash-in refinance. Still, there are other options for paying down your mortgage. Here are some cash-in refinancing alternatives and some different ways you might choose to use your funds instead.

Make a One-Time Principal Reduction Payment

Nearly all mortgages will allow you to make extra payments to reduce your principal balance. You don’t need to refinance to do so if this is your only goal.

With a one-time principal reduction payment, you will lessen how much you owe and shorten the time until your home is paid off. This will save you interest over the life of the loan. 

It won’t, however, adjust your monthly payment. You’ll still be on the hook each month for the same amount you currently pay.

Get Your Mortgage Recast

If you have a conventional loan, you may be able to lower your monthly payments without refinancing. With a mortgage recast, you can make a one-time principal reduction payment and have your lender re-amortize your future payments based on the new loan balance.

Your interest rate and number of remaining payments won’t change, so it will still take you the same amount of time to pay off your loan. However, the reduced balance will mean paying less each month and in total lifetime interest.

Mortgage recasts typically have a fee of $250 to $500, which is much cheaper than refinance closing costs. They also generally require a principal payment of at least $10,000. 

However, government-backed loans cannot be recast, and not all conventional mortgage providers will allow them. You’ll need to check with your current lender or loan servicer to determine your eligibility.

Pay Down Higher-Interest Loans

When you have a surplus of cash, paying down a significant debt like your mortgage can be tempting. But if you currently have other higher-interest loans, obligations like auto payments or credit card debt, it might make more sense to pay them off instead.

Type of DebtExample Interest RateAnnual Interest Cost Per $10k
Home Mortgage6%$600
Automotive Loan9%$900
Personal Loan14%$1,400
Credit Card Debt25%$2,500

While long-term interest costs can vary depending on the terms of different loans or the length of time you maintain a credit card balance, allocating your funds to higher-interest debts will result in immediate savings. Doing so can also potentially free up your budget by eliminating smaller payments altogether.

Maintain a Reserve Fund

Paying down your mortgage can be a great idea. However, it’s important to still maintain funds in reserve for unplanned expenses and emergencies.

If you’re contemplating putting all your on-hand cash into your mortgage, you may want to reconsider. While the feeling of owing less on your home can be powerful, you don’t want to wind up “house rich, cash poor.”

Invest for a Higher Rate of Return

If your existing mortgage has a low interest rate – especially if your loan is in the 3% to 4% range or below – you may not want to pay down that balance.

In this situation, investing the funds in opportunities offering a higher rate of return could make more financial sense. However, when weighing your options, consider both the uncertainty of investments and the predictable results of reducing your outstanding debt.

Is a Cash-In Refinance Right for You?

If you’re planning to refinance and have the cash available to pay down your mortgage balance, a cash-in can help you reduce your monthly payment, qualify for a lower interest rate, and even eliminate costly mortgage insurance premiums.

But you have other options – even for paying down your mortgage – which could be more practical in certain situations. To determine if a cash-in refinance is right for you, talk with an experienced lender who can review how different strategies could affect your payments and finances.

Jonathan Davis - Author at Refi.com

Jonathan Davis

Jonathan Davis is a Florida-based writer with over a decade of experience helping consumers understand complex mortgage, real estate, and personal finance topics. Jonathan has previously worked in the real estate industry and holds a bachelor’s degree in finance from the University of Central Florida.

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