by Maurie Backman | June 21, 2021
Many or all of the products here are from our partners. We may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
If you're going to take money out of your home, make sure it's for the right purpose.
Mortgage refinance rates are very low these days, so a lot of borrowers are getting new home loans to take advantage of them. Now, when it comes to refinancing, you have choices. You could do a standard refinance where you borrow your exact mortgage amount, or you could do a cash-out refinance where you borrow more than what you owe on your home and then use the extra money for whatever purpose you'd like.
In some situations, a cash-out refinance can be a smart move. But here are three bad reasons to get one.
Get free access to the select products we use to help us conquer our money goals. These fully-vetted picks could be the solution to help increase your credit score, to invest more profitably, to build an emergency fund, and much more.
By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.
After the year we've all had grappling with the pandemic, we could all use a getaway -- maybe even an extended one. But borrowing money to take a vacation isn't usually a financially sound move.
Remember, a cash-out refinance is still a loan. When you do one, you wind up with a larger mortgage balance than what you started with, and while you may manage to snag an affordable interest rate on your new mortgage, it's debt nonetheless. A better bet is to take a low-key vacation now if that's all you can swing, and then work on saving up enough money to take a longer, more extravagant one down the line.
If you've been falling behind on your bills for quite some time, you may be tempted to do a cash-out refinance. That way, you could use the extra money to supplement your income and keep up with your bills.
But actually, that's not a great idea. If you consistently can't cover your living expenses, it means you're spending too much. And if so, your best bet is to set up a budget so you can track your spending and start cutting back in areas where you have the most wiggle room.
If you have a large amount of credit card debt in your name, then a cash-out refinance could be a good way to pay it off. Imagine you owe money on a credit card charging 22% interest, and you can refinance your mortgage at 3.2%. If you take the proceeds from your cash-out refinance and use that money to pay off your credit card debt, you'll save yourself a lot of money on interest, so doing that makes sense when your credit card balance is substantial.
But if you only owe, say, a few hundred dollars on a credit card, then a cash-out refinance may not be as cost-effective as you'd think. That's because you'll pay closing costs on the amount you borrow that could easily end up equaling 5% of your loan. If your credit card debt is minimal, you may be better off seeking out a balance transfer credit card offer instead.
A cash-out refinance could help you consolidate large debt, make improvements to your home, or pay for expensive repairs you've been putting off. But don't do a cash-out refinance if your goal is to spend money on something you can't afford, maintain a lifestyle you can't really swing, or pay off a minimal amount of debt. There are better ways to address those issues, and if you do a cash-out refinance in any of those situations, you might end up regretting it.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
The Ascent's in-house mortgages expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See The Ascent's full advertiser disclosure here.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.