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What is a cash-in refinance, and how does it work?

Yahoo Personal Finance· Getty Images
Reyna Gobel
Updated 6 min read

Maybe you bought your home when your finances weren’t in top shape, so you got stuck with a higher interest rate or monthly payment than you wanted. But since then, you’ve paid down debt and boosted your credit score. You’ve also saved up some money, received an inheritance, or gotten a bonus from your job. This could be the opportune time for a cash-in refinance, which can land borrowers better interest rates and lower monthly payments.

We’ll discuss how a cash-in refinance works, the pros and cons, and worthwhile alternatives if you decide a cash-in refi isn’t for you.

In this article:

Learn more: Is now a good time to refinance your mortgage?

A cash-in refinance involves replacing your current loan with a new one and paying a lump sum of cash to make a larger down payment on the new mortgage.

For instance, let’s say you owe $380,000 on a home with a $400,000 value. You do a cash-in refinance and add $40,000 more to your down payment. Your new loan would be $340,000 (380,000 - 40,000 = 340,000).

A “cash-in” refinance is basically the opposite of a “cash-out” refinance, which consists of tapping into your home equity to receive cash and then taking out a larger mortgage loan. Instead, with a cash-in refi, you put more cash toward refinancing and take out a smaller mortgage.

Read more: What is a rate-and-term refinance?

A cash-in refinance loan can save homeowners money for two big reasons. First, interest rates make a big difference in the cost of financing your home. With a larger down payment and potentially stronger overall finances, you could get a lower interest rate when refinancing.

Second, if your mortgage principal goes down, you also decrease the amount you’ll pay in interest. For instance, paying 6% APR on $340,000 comes out to less than paying 6% APR on $380,000. Over the life of the loan, you could save tens of thousands of dollars.

Read more: 5 ways to prepare for a mortgage refinance

Nope. There are many strategies homeowners can use for paying off a house early. You can pay a lump sum and request your lender apply it toward the principal balance. You can also make one extra payment per year, make biweekly payments (which adds a full monthly payment per year and reduces the mortgage balance), send in workplace bonuses or tax refunds as you get them, or even pay as little as $20 extra per month.

  • Your monthly payments may be lower for the remainder of your loan repayment term.

  • You could get a lower interest rate if market rates have dropped.

  • You can switch to a shorter loan term, such as 15 years instead of 30 years.

  • You could switch from an adjustable-rate mortgage to a fixed-rate mortgage so you don’t risk your rate increasing later.

  • You’ll build equity faster.

  • A smaller principal balance means you’ll pay interest on less money.

  • The new closing costs may offset interest rate savings.

  • There may be more effective ways to use your lump sum of cash.

  • You could get hit with a mortgage prepayment penalty. Read your current mortgage rules and ask your lender about any penalties beforehand.

Learn more: How soon can you refinance a mortgage after buying a home?

Whether your goal is to pay off your loan earlier, improve your overall finances, or reduce your interest rate, several options may help you do this without refinancing and paying new closing costs.

Borrowers don’t have to get a new loan and pay a large lump sum to a mortgage lender to reduce a loan balance. You can just make a larger monthly mortgage payment. Paying down your mortgage faster can also help you get rid of private mortgage insurance (PMI) because the lender will cancel it once you have 22% home equity.

Learn more: 7 ways to pay off your mortgage faster

Before applying for a cash-in refinance loan or paying off your home loan early, consider your overall personal finances. Are there other financial goals you’d like to achieve with the extra money you would put toward the cash-in refi lump sum? Maybe you haven’t started putting money into your 401(k) yet and are missing out on a company match. Or maybe you need to build an emergency fund.

You could use your extra money to pay off debt and lower your debt-to-income ratio (DTI). Credit cards, personal loans, or private student loans may have higher interest rates than your mortgage, so you could target higher-interest debt while lowering your DTI. You’ll reduce your overall monthly payment obligations by paying off other debts. And if you do decide to refinance your mortgage later or apply for a different type of loan, a lower DTI can help you snag a better interest rate.

Recasting a mortgage is similar to a cash-in refinance in that borrowers make a hefty lump sum payment to a mortgage loan. But with a recast, you keep your term length and interest rate and don’t pay closing costs. The lender then changes your monthly payments based on your new outstanding balance, and you’ll pay less in interest in the long run. The lender can also remove PMI when you recast. This can be a good option if you have a low interest rate on your current mortgage and don’t want to refinance into a higher one.

Learn more: How a no-closing-cost refinance works

It depends on your financial goals and how you want to use your lump sum of cash. If a cash-in refinance helps you lock in a lower interest rate or monthly payment, it’s worth considering. But ask yourself if there’s a better way to use that cash, such as setting up an emergency fund.

Read more: 7 types of home refinance options

A cash-in refinance means providing more cash during the refinancing process to reduce the new loan amount.

It depends on the situation. A cash-in refinance requires a large lump sum of money, so the real question is whether this is the best use of that cash or if it would better serve other financial goals.

Both types of refinancing involve replacing your old mortgage with a new one. With cash-out refinancing, you replace your original mortgage with one with a larger loan balance so you can tap into your home equity and receive cash. A cash-in refinance is essentially the opposite. You make a larger cash payment, so your new loan balance is smaller.

This article was edited by Laura Grace Tarpley