3 Reasons I Won't Do a Cash-Out Refinance

Some homeowners love cash-out refinances, but I have no plans to go this route.

Mortgage refinance rates have sat at attractive levels since last summer. And not surprisingly, many homeowners have rushed to swap their existing home loans for new ones with more favorable terms. But within the realm of refinancing, there's the option to do a cash-out refinance. If you go this route, you get to borrow more than your remaining mortgage balance, and you can use that excess cash for whatever purpose you please.

Cash-out refinancing is an appealing option for many people. And since I have plenty of equity in my home (meaning, I own a large portion of my home outright), I could've easily done a cash-out refinance when I refinanced my mortgage last summer. Instead, I chose a traditional refinance, and probably won't look to do a cash-out refinance anytime soon. Here's why.

1. I don't want to add to my mortgage's principal

When you do a traditional refinance, you borrow the same amount that's left on your mortgage. With a cash-out refinance, you borrow more.

Now if you've only owned your home for a few years, you may not have chipped away at much of your loan's principal. Due to the way mortgages work, in the early years of paying off your loan, the bulk of your payments go toward interest, not your loan's principal. But since I've been paying off my home for over 11 years, I've chipped away nicely at my mortgage's principal, and at this point, I don't want to add to it and dig myself further into debt -- even though mortgage debt is the healthy kind to have.

2. I don't want to be tempted to spend money frivolously

Cash-out refinances are extremely flexible in that you can borrow that excess cash for any reason. But I don't think that's a good thing, because it means any given homeowner can take that money and spend it on vacations, electronics, or other things that just aren't necessities.

On my end, I don't have a real reason to do a cash-out refinance. Some people go this route to consolidate other debt, but since I don't have any loans outside of my mortgage and I don't owe money on any credit cards, that's not necessary for me. Also, I'm not planning any major home improvement projects in the near term. As such, if I were to do a cash-out refinance, I'd be tempted to take that money and spend it on a dream trip -- a nice thing to do, but something I feel I should save up for rather than borrow.

3. Refinancing can be a hassle

Refinancing a mortgage takes work. You need to shop around for rates, fill out applications, provide documentation, and be available to answer questions your refinance lender might have. It's worth making that effort if refinancing a mortgage will save you money. But after having recently refinanced, I'd rather not go through that process again. So even if a need to borrow money does arise for me in the next few years, I may seek out alternatives that don't involve getting a new home loan.

For many homeowners, cash-out refinancing is a smart way to pay off debt or to renovate a property affordably. But I don't see it being a good option for me anytime soon.