Should You Get a Cash-In Refinance?

A cash-in refi is when you make a lump-sum payment toward your mortgage during a refinance. This leaves you with a lower loan balance.

For example, you have a $300,000 loan. Closing costs on the refinance are $5,000. You pay $55,000 at the closing table and end up with a new loan of $250,000.

It’s the opposite of a cash-out refinance, where you receive cash at closing.

But why would someone want to pay money out-of-pocket when they refinance? There are quite a few advantages.

Check today's cash-in refinance rates.

Cash-In Refinance Advantages

While not common, cash-in refinances can leave you in a better financial position.

Lower Loan Balance

Paying money at closing reduces your loan balance and increases home equity.

Better Rate

You might receive a better rate on your refinance thanks to a lower loan-to-value (LTV). Lenders charge less for lower-risk loans, i.e. ones with smaller balances compared to the home value. For example, your loan might be 0.25% to 0.50% lower with a loan that’s 60% of your home’s value rather than 80%.

Lower Payment

With a lower mortgage balance and rate, your payment is probably more affordable. You may also pay less interest over the life of the loan.

The Ability to Refinance

If you made a very small down payment, you may need to pay cash at closing to be eligible for a refinance. For example, you purchased a home with a zero-down USDA loan (100% LTV). You would like to refinance into conventional. You may need to pay the loan down to 95% of the current home value.

Remove PMI

You need 20% equity to eliminate private mortgage insurance (PMI). You may need to pay money at closing to remove PMI.

When to Use a Cash-In Refinance

A cash-in refinance is best when you’re already refinancing for another reason:

• Getting a shorter or longer loan term

• Changing an adjustable rate mortgage to fixed

• Getting out of a hard money loan

• Removing mortgage insurance

• Reducing your rate

There are probably better ways to reduce your loan balance if that’s you’re only goal (see “Alternatives” section below). But if you plan to refinance anyway, you might consider a cash-in refi.

Perhaps you received an inheritance or a bonus from work. You might have sold another property and have funds sitting in a checking account.

If your current mortgage rate is high – say 7% – it could be a very good idea to lower your mortgage balance. It’s essentially a 7% return on your money, better than you might do with investments.

However, if you have a very low mortgage rate around 3%, you may not want to apply cash toward your mortgage, especially if you have to take on a higher rate. Factoring inflation, your current mortgage is almost free money.

Consult with a financial advisor before making any big moves with your money, and check out cash-in refi alternatives below.

Cash-In Refinance Alternatives

Simply pay down the loan: Making a lump-sum payment to your loan won’t affect your payment. But it will help you pay off the loan faster and decrease interest costs. Most loans have no penalty for paying down the balance.

Get a mortgage recast: A little-known option is a mortgage recast. Some lenders let you pay down the loan and adjust your payment based on the new balance. You keep the same rate. Costs are much lower than a full refinance and you can even eliminate PMI.

Invest elsewhere: You may come out ahead by investing in the stock market, a rental property, or to pay down high-interest debt rather than paying down the mortgage.

Risks of a Cash-In Refinance

Putting money into your mortgage isn’t a sure bet. Here are risks.

• Opportunity cost: You may earn a higher rate of interest in another investment

• You may need the money later: If you lose your job or otherwise need the funds, you may not qualify for a new loan to receive the funds back. If you do qualify, you’ll incur extra costs doing another refinance.

• Your rate might rise: Those who have a mortgage in the 3-6% range would likely take on a higher rate to refinance. You might pay more interest long-term.

• Benefits may not outweigh the cost: Refinances cost 2-4% of your loan balance. If you sell or refinance again within three or four years, you might not recoup the expense.