What is a Cash-In Refinance?
If you’re making high monthly payments on a mortgage but can’t qualify for a refinance, you might have heard of the opportunity for a cash-in refinance. A cash-in refinance happens when the homeowner brings a cash sum to put towards their home equity to become eligible for traditional refinance options.
Because most lenders require a maximum loan-to-value ratio, homeowners who don’t have a lot of equity in their property often can’t qualify. If you can provide the difference in cash, you can become eligible and then qualify for those lower monthly payments. While handing over thousands of dollars in cash isn’t a pleasant idea, it can help homeowners who need to refinance to a lower monthly payment and in some cases can make sense as an investment strategy.
Cash-in vs. Cash-out Refinancing
Cash-in and cash-out refinancing are different scenarios, but the principle is the same: either you’re bringing cash to your mortgage to increase equity for a refinance that will lower your monthly payments, or you are refinancing in order to take that equity out in the form of cash. In both of these scenarios, cash holds the power; it either boosts your home equity or is taken out to be used for other financial decisions.
What Happens to Home Equity?
A cash-out refinance mortgage takes some of your home equity out of your loan to be used as cash. A cash-out requires significant equity to have already been built up in the home, which is then lowered when you take out a portion of it in cash.
A cash-in refinance happens when you don’t have enough equity to qualify for a traditional refinance. It’s an opportunity to boost your home equity by injecting a large amount of capital at one time when monthly payments haven’t built up as much as you need to refinance.
When a Cash-In Refinance Makes Sense
Let’s take a step back to look at an example of when a cash-in refinance is helpful. Say that you bought a home for $400,000 at the height of the housing market. Now the property value is only $300,000, and you’re stuck with a mortgage that’s worth more than the house. You want to refinance to get lower monthly payments, but you don’t have enough equity in the large mortgage to qualify for a refinance.
Getting “Above Water”
A cash-in helps absorb the part of your mortgage that’s keeping you underwater in your payments. If your years of payments have only gained you a small percentage of equity, bringing cash will make you eligible for the refinance by improving your loan-to-value ratio, which will allow lower payments and the ability to stay “above water” on the overall loan.
Improving Loan-to-Value Ratio
A loan-to-value (LTV) ratio is calculated by dividing your remaining mortgage amount by the value of your property. Today, banks typically require an 80% LTV; that would mean that the maximum amount you could have left in your mortgage on a $300,000 home would need to be $240,000. But if you’re still paying off the initial mortgage of $400,000, chances are you have a lot more to pay off before getting to that 80% LTV ratio. Bringing cash to the refinance allows the opportunity to qualify you for that refinance without waiting years for your monthly mortgage payments to accumulate.
Once your LTV ratio is in the right place, lenders can help you refinance your home. That new equity you’ve built up will give you lower interest rates and can lower monthly payments to reflect the remaining value left to be paid.
Getting Rid of Private Mortgage Insurance
Another advantage to building up equity with a cash-in refinance is that it can remove required PMI payments. PMI (private mortgage insurance) is required for conventional loans by most lenders until homeowners have paid off 20% of their mortgage. If you’re stuck with a big mortgage, it can take a long time to get rid of PMI. With a cash-in refinance, your equity will jump and give you the opportunity to stop making those monthly payments.
When to Say NO to a Cash-in Refinance
There are certain scenarios in which a cash-in refinance is not the best option. It’s important to remember that a refinance extends the terms of your loan, and that the lower monthly payments will take more time to pay off the total mortgage balance. It’s good for your month-to-month finances but will extend the time it takes to pay off your home. Since the loan term is extended, you will also be paying a larger amount of interest to the bank.
Another factor to consider is how long you plan on staying in the home. Putting hard-earned capital towards a home that you plan to sell in a year might not actually help you financially; instead, that cash is frozen in a property that you don’t plan to keep.
Cash is King
The bottom line of refinancing is deciding how best to use the cash that you have in hand. If refinancing will get you a lower interest rate in a home that you plan on living in for a long time, that initial cash investment makes sense. But if the interest rates on your mortgage are already low or if you are considering moving, you may want to use that capital on another investment with a higher return rate instead of tying it up in your property.
This page last updated: March 21, 2022