What refinance would require money to be brought to the mortgage at closing? Cash-in refinance does and it’s a strategic move to eliminate your mortgage insurance and more. Because it requires a cash infusion, this refi option is clearly not for everyone. But it can work well if all things are considered.
Cash-in Refinance vs Cash-out Refinance
A cash-in refinance is paying down your mortgage so you can lower your loan-to-value ratio. It works in reverse to a cash-out refinance which is withdrawing money out of your equity and in turn taking out a bigger loan.
Benefits of Cash-in Refinance
Lenders typically require 80% LTV in order to refinance. If you fall short of that or have less than 20% in equity, you will likely pay a mortgage insurance or PMI. This PMI safeguards your continued payment on the mortgage and protects the lender’s interest in the home.
For illustrative purposes, you have a $200,000 mortgage on a $250,000 home. Then the value of the home, as currently appraised, is $200,000. Using the formula for LTV (your mortgage’s outstanding balance divided by your home’s current value), you’ll get 100% LTV, from the 80% LTV back then.
To bring this LTV to at least 80%, you need to cash in $40,000 to get a new mortgage amount of $160,000 to refinance your old mortgage.
In the above scenario, the cash-in refinance will help you:
- Remove the PMI
- Get a lower interest rate
- Lower your monthly payment
Cash-in refinances are also used to pay down second mortgages like home equity loan.
Considerations for Cash-in Refinance
Apparently, not everyone has $40,000 lying around at closing. This leads us to some serious considerations on who should do and when to do a cash-in refinance.
1. Is your money earning just a little each year? Cash stashed in deposit or savings account earn little to nothing. If you have money stored in those low-yielding accounts, it could make sense to put them in your home instead. But if you are able to find investment vehicles that pay more on your money, then you may forego using your cash for the mortgage.
2. Are you prepared financially? Your job should be stable enough to support your current needs and future expenses with the help of life savings. What this all means is that you have enough cash/reserves set aside so you can live comfortably when you do a cash-in refi.
3. How long are you staying in the home? The break even point of a mortgage happens a few years after the refinance. With the cash infusion factored in, the best option is to stay in the home longer or preferably during the life of the loan. This way you can maximize the returns of your cash-in refinance and recoup the costs of the refinance. If you plan to move out in a few years’ time, keep your cash stashed elsewhere.
Essentially, a cash-in refinance is an ideal scenario for those who can free up cash to pay down their mortgage, lower their LTV, remove their PMI, and lower their rate and payment when refinancing, and remain financially liquid well after that.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.
