What Is a Cash-In Refinance?

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 key considerations. 

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What Is a Cash-In Refinance?

As the name implies, 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 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. 

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 pay down more. Like most other refinance options, you must pay closing costs.  

How Does a 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). Better yet, 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 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. 

What Is the Difference Between Cash-In Refinance vs. Cash-Out Refinance?

The difference between a cash-in refinance and a cash-out refinance is substantial. While both mortgage refinance options give you a new mortgage and allow you to pay off your original loan, a cash-out refinance takes equity out of the home for renovations, medical care, or other needs. With a cash-in refinance, you pay down more equity in the home. 

You might choose a cash-out refinance to pay for major home repairs or renovations, sudden, major, unexpected expenses such as medical costs, or access some of the equity in your home for retirement needs. Check out the  best cash-out refinance lenders here if you need cash from your home. 

In contrast, you might choose a cash-in refinance if you're successfully saving more or receive a sudden infusion of cash from an inheritance, bonus, prize, or other windfall. You might also choose a cash-in refinance if you've recently received a raise or promotion at work that allows you to pay off more of your mortgage. 

Pros and Cons of Cash-In Refinance

A cash-in refinance has pros and cons based on your financial situation. Here's what you'll want to consider. 

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 and investing in index funds or putting the money in a high-yield savings account. 

In the case of the $75,000 in the example above, if you put it into a high-yield savings account with 4% interest, after 30 years, you'd have $243,255, more than double the interest savings on the cash-in refinance mortgage. 

How to Get a Cash-In Refinance

If a cash-in refinance seems like the best option, here are the steps to secure your refinance. 

Check if You Qualify

You will need to compare lender options, as many of these criteria vary from lender to lender. However, in general, to qualify you'll need: 

• Credit score: A minimum FICO Score of 620 is typically required for a mortgage, but many lenders seek a higher score. Aim for a credit score of 760 or higher for the best possible interest rates.
• DTI: Lenders typically prefer a DTI ratio of 36% or less, although in some cases, you could qualify for a refinance with a DTI up to 50%, especially with a much larger down payment. 
• Proof of income: You must provide pay stubs, W2s, bank statements, and/or two years' income tax returns. 
• Home equity: Many lenders prefer homeowners to have at least 20% equity in the home before refinancing. With additional cash-in, you could also reach the 20% equity threshold. 

Shop Around for Lenders

Carefully compare lenders' annual percentage rate or APR, the total interest you'll pay on the loan each year. Look for additional fees, and check customer reviews to compare lenders. 

Gather Necessary Documents

Typical documents include a government-issued ID, your Social Security number, proof of income including paystubs or W2s, bank statements for proof of income or assets, and two years' tax returns (for verification of income). 

Apply for the Refinance

You can apply for the refinance online or at banks or credit unions. The application should take under an hour if you have the required documents ready. After the initial application, the lender may ask for additional documents. It will also typically request an appraisal and home inspection before finishing the underwriting process. 

Close on the New Loan

Once you've been approved for the cash-in refinance, you're ready to close on the loan. Carefully review the loan documents, and if necessary, ask a real estate attorney to review the contract before signing. 

You're ready to sign once you're confident in the new terms, including interest rate, fees, early repayment policies, and other terms. You'll make the additional cash-in payment and close on the loan. 

Compare the Best Mortgage Refinance Lenders From Benzinga’s Providers

You can find excellent mortgage refinance options from Benzinga's vetted providers. Start your comparison search today!

Alternatives to a Cash-In Refinance

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. 

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 Get a Cash-in Refinance?

Congratulations if you've inherited some money, received a bonus, won the lottery, or received another windfall! Now, it's time to consider your best strategy. A cash-in refinance is one option that could lead to mortgage savings. However, other options include making a principal-only payment, biweekly mortgage payments, or paying off the mortgage entirely. 

Likewise, you could consider investing that lump sum in index funds, a diversified investment portfolio, or a high-yield savings account and potentially saving even more. What's best for you will depend on your financial goals. For many families, a combination of the strategies above can help you pay off your mortgage faster and maximize compound interest on long-term savings. 

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