Cash-In Refinance: A refinance where the borrower brings additional equity to closing rather than receiving proceeds. This occurs when the new maximum loan amount is less than the current loan balance plus transaction costs.
When Does a Cash-In Refinance Happen?
You bought at a 5% cap, locked a 4.5% rate, and everything worked. Five years later, you need to refinance—but cap rates are 7%, interest rates are 7.5%, and your property is worth less on paper than your loan balance.
Welcome to the cash-in refinance: the moment when you realize refinancing costs money instead of generating it.
What Causes the Proceeds Gap?
Three factors combine to shrink your refinance proceeds:
| Factor | What Changed | Impact |
|---|---|---|
| Interest Rates Rose | Your rate went from 4.5% to 7% | Higher debt service = lower DSCR-constrained loan |
| Cap Rates Expanded | Market cap rate went from 5% to 7% | Lower value = lower LTV-constrained loan |
| NOI Declined | Expenses up, rents flat, vacancies | Lower NOI = lower value and DSCR |
The Double Squeeze: Rising rates and expanding cap rates hit you twice. Higher rates reduce DSCR-based proceeds AND higher cap rates reduce LTV-based proceeds. You get the minimum of both constraints—which in a down market, is much less than you expect.
How Do I Calculate the Cash Required?
Cash-In Calculation Example
Scenario: Refinancing a 20-unit property after 5 years. Original loan $2M at 4.5%. Property NOI is $120,000.
| Component | Original (2020) | Refinance (2025) |
|---|---|---|
| Interest Rate | 4.50% | 7.25% |
| Cap Rate | 5.00% | 7.00% |
| Property Value | $2,400,000 | $1,714,286 |
| Max LTV (80%) | $1,920,000 | $1,371,429 |
| Max DSCR (1.20x) | $1,950,000 | $1,380,000 |
| Actual Loan | $1,920,000 | $1,371,429 |
The Cash-In Math
| Current Loan Balance | $1,800,000 |
| Prepayment Penalty (est. 2%) | $36,000 |
| Closing Costs | $35,000 |
| Total to Pay Off | $1,871,000 |
| New Loan Amount | $1,371,429 |
| Cash Required at Closing | $499,571 |
The Half-Million Reality: In this scenario, refinancing requires bringing nearly $500,000 to closing. Many borrowers don't have this liquidity—leading to difficult decisions about the property's future.
What Are My Options If I Can't Bring the Cash?
| Option | How It Works | Considerations |
|---|---|---|
| Wait It Out | Don't refinance; wait for better market conditions | Only works if current loan isn't maturing |
| Loan Extension | Ask servicer to extend current loan maturity | Rarely granted; requires strong payment history |
| Sell the Property | Exit the investment entirely | May still face proceeds shortfall |
| Equity Partner | Bring in new capital in exchange for ownership | Dilutes your returns |
| Cross-Collateralization | Pledge other assets to increase loan | Increases portfolio risk |
| Mezz/Preferred Equity | Layer additional debt behind Freddie Mac | Usually prohibited by Freddie Mac |
The Extension Option: If you have a strong payment history and the property is performing, some servicers will consider a 1-2 year extension. This buys time for rates to stabilize or for you to build reserves. Ask early—don't wait until the maturity date.
How Do I Minimize the Cash-In Amount?
You can't control rates or cap rates, but you can optimize what you do control:
Maximize Your Refinance Proceeds
- Push Rents to Market: Every $100/month in rent = $1,200/year NOI = ~$17,000 more value at 7% cap
- Cut Expenses: Renegotiate contracts, reduce controllable expenses, eliminate waste
- Fill Vacancies: Economic occupancy directly impacts NOI and DSCR
- Time the Rate Lock: Watch Treasury movements; even 25 bps can mean $25K+ in proceeds
- Challenge the Appraisal: Use the ROV process if the cap rate is too aggressive
- Negotiate Prepayment: Some yield maintenance can be negotiated in refinance scenarios
What If I Wait vs. Refinance Now?
The decision to refinance at a loss vs. waiting depends on several factors:
| Factor | Refinance Now | Wait |
|---|---|---|
| Loan Maturity | Maturing soon—must act | Years of runway remaining |
| Rate Direction | Rates may rise further | Rates may decline |
| Liquidity | Have cash available | Need time to accumulate |
| Property Trajectory | NOI is stable/declining | NOI is growing (rent increases) |
| Personal Plans | Want certainty, move on | Can manage through uncertainty |
The Maturity Cliff: If your loan is maturing, you don't have the luxury of waiting. A maturing loan that can't be refinanced creates a default risk. Start planning 18-24 months before maturity.
What's the Worst Case Scenario?
If you can't refinance and can't bring the cash:
| Maturity Default | Loan matures, you can't pay off, borrower defaults |
| Foreclosure | Freddie Mac forecloses, takes the property |
| Carve-Out Liability | Form 6025 guaranty may be triggered for fraud/misrepresentation |
| Credit Impact | Default reported, future Freddie Mac loans extremely difficult |
| Deficiency | If sale proceeds don't cover debt, you may owe the difference |
The Bankruptcy Consideration: In extreme cases where the gap is insurmountable, some borrowers consider bankruptcy protection. This is a last resort with severe long-term consequences. Consult legal and financial advisors early.
How Do I Plan for This in Advance?
The best time to prepare for a cash-in refinance is before you need one:
Proactive Risk Management
- 18-Month Check: Run refinance scenarios 18 months before maturity using current market rates
- Build Reserves: Set aside cash each month for potential refinance gap
- Track Market Rates: Monitor Treasury yields and cap rate trends in your market
- Maximize NOI: Every dollar of NOI growth reduces your potential shortfall
- Consider Early Refinance: If rates are favorable and you're in open period, don't wait
- Line Up Capital: Know where you'd source additional equity if needed
The Bottom Line: A cash-in refinance isn't a failure—it's a market reality. Rising rates and expanding cap rates create gaps that someone must fill. The question is whether you have the liquidity and conviction to bridge that gap, or whether it's time to exit the investment.