What Is a Cash-In Refinance?

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A cash-in refinance is the opposite of a cash-out refinance: you'll refinance your mortgage for a lower interest rate with a higher down payment.

Maybe you've gotten an inheritance, a bonus at work or started a side hustle to bring in extra income. If you've got a little extra cash, a cash-in refinance could help you save even more long term. 

Should you refinance with cash in? There are many advantages, but it's not the best choice for everyone. Read on to understand the key considerations and how it differs from a cash-out refinance. 

What is a Cash-In Refinance 

A cash-in refinance is a type of mortgage refinance in which you put more cash in, thus adding equity to your home. While it might not be talked about as much as its opposite, the cash-out refinance, a cash-in refinance can have major financial benefits.

With this refinance option, you’re putting more equity into your home. That's in contrast to a cash-out refinance where you take equity out of your home. By reducing your mortgage balance with a cash-in refinance, you could qualify for a lower interest rate. Even a 1% reduction in interest rate could help you save tens of thousands of dollars (or more) over the loan's lifetime. 

“This is great for someone who comes into a large sum of money and would like to lower their mortgage payment, reduce the amount of interest they are paying over the life of the loan and possibly pay off the mortgage much earlier,” says Reed Letson, owner of Elevation Mortgage. 

With a cash-in refinance, you'll pay off your existing mortgage and take on a new loan. In this case, you'll go into closing ready to put down a larger down payment. Like most other refinance options, you must pay closing costs. 

“You will want to be aware of the current market rates,” Reed adds. “For example, if you currently have a 3% interest rate and you want to look at a cash-in refinance, but current market rates are 6%, a cash-in refinance may not benefit you enough to make it worthwhile.”

Pros

• Save on interest: A larger down payment may qualify you for a lower interest rate. You'll pay interest on a smaller loan, which increases your savings. 
• Remove PMI: If you pay at least 20% equity into your home, you should be able to remove private mortgage insurance. 
• Pay off your loan faster: With a cash-in refinance, you could choose shorter mortgage terms, allowing you to pay off your mortgage and own your home outright sooner. 
• Lower monthly payments: Lower interest rates typically mean lower monthly payments, allowing you more flexibility in your monthly budget. 

Cons

• Closing costs: You'll need to pay closing costs with the refinance, potentially negating the benefits of a lower interest rate. You could save just as much with biweekly mortgage payments or principal-only payments. 
• Possible prepayment penalties: While less common, some mortgage lenders still charge a prepayment penalty, which could negate any potential savings. 
• Not always the best use: If you receive a lump sum, consider other investment options that offer a higher possible return, such as maxing out your 401(k) and IRA, investing in index funds or putting the money in a high-yield savings account. 

How Does Cash-In Refinance Work

With a cash-in refinance, you'll replace your current loan with a new one and make a lump-sum payment toward a larger down payment on the new mortgage.

Here's an example:

Suppose you owe $390,000 on a home with a $400,000 value. You do a cash-in refinance and add $35,000 more to your down payment. Your new loan would be $355,000 ($390,000 – $35,000 = $355,000). If you had $75,000 to pay down, your loan amount would drop to $315,000, with over 20% equity in the home. 

During the refinance process, you'll have to pay closing costs plus a larger down payment. However, you could save significantly on loan interest. 

In the example above, you could drop private mortgage insurance if you paid the loan down to $315,000. In addition, if your lender drops your interest rate from 7% to 5.5%, you'd save about $307 a month on your mortgage payments ($2,095.70 vs. $1,788.54). Over the lifetime of the loan, you'd save $110,000 on interest payments, making the $75,000 upfront payment potentially worth it. 

Cash-In Refinance Alternatives 

In addition to a cash-in refinance, you can consider common alternatives. Here's an overview. 

Mortgage Recast

A mortgage recast is the most similar to a cash-in refinance: you make a lump-sum payment toward the principal balance of your loan, and then the lender will re-amortize your mortgage with the new balance. However, unlike a cash-in refinance, your interest rate and term remain the same, but your monthly payments could be lower. 

“Unfortunately, many loan types do not offer a recast (FHA and VA), and some servicers may not do them at all,” Reed says.

Cash-Out Refinance

With a cash-out refinance, you can access equity in your home for other needs. This can lead to higher interest rates, a longer term or other changes to your mortgage terms. You can find the pros and cons of a cash-out refinance here. 

Home Equity Loan

A home-equity loan allows you to access home equity for other purposes, such as renovations or major home repairs. While similar in purpose, a home-equity loan differs from a cash-out refinance. With a home-equity loan, your original mortgage remains in place, while a cash-out refinance allows you to pay off the original mortgage and gives you a new mortgage loan with new terms. 

HELOC

A home equity line of credit or HELOC is an alternative to a home-equity loan. Instead of a lump-sum payment, a HELOC allows you to draw on your home's equity for a set draw period and only use it as needed. You'll also only pay interest on what you borrow. 

You can start your explanation by differentiating home equity loans from HELOCs so that you can interlink (below) contextually. 

Extra Payments

Making extra mortgage payments is the most direct alternative to a cash-in refinance. For example, if you make a principal-only payment or make biweekly mortgage payments, you could pay off the loan years earlier and save thousands in mortgage interest.

Should You Do A Cash-In Refinance?

• A cash-in refinance can lead to lower monthly mortgage payments.
• You could potentially save substantially on mortgage interest.
• Carefully weigh the pros and cons of this type of refinance with other payment options like a principal-only payment, biweekly mortgage payments or regular additional mortgage payments
• Research and compare lenders to maximize returns on your additional cash

Why You Should Trust Us

Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his New York City economy coverage. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.

For this story, we worked with Reed Letson, a mortgage broker and owner of Elevation Mortgage in Colorado. 

Frequently Asked Questions 

Sources

• Reed Letson, owner of Elevation Mortgage