4 Smart Uses for a Cash-Out Refinance
by Maurie Backman | Updated July 19, 2021 - First published on Feb. 13, 2021
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If you're going to apply for a cash-out refinance, do so for the right reasons.
Refinancing your mortgage is a great way to lower your monthly home loan payments and save on interest to boot. And when it comes to refinancing, you have choices. You can do a regular refinance, where you get a new mortgage with a balance equal to what's left on your current home loan, or you can do a cash-out refinance.
A cash-out refinance lets you borrow more than your remaining mortgage balance. For example, if you have enough equity in your home, you may be able to refinance to a $120,000 mortgage when you only owe your current lender $100,000. That extra $20,000 would then come to you in a check, and you'd get to use it as you please.
You can do a cash-out refinance for any reason -- responsible or otherwise. But while taking money out of your mortgage to go on vacation or buy electronics may not be the smartest thing to do, here are a few good uses for a cash-out refinance.
1. Paying off credit cards
If you owe money on your credit cards, you may be paying a pretty high interest rate on that debt. As such, a cash-out refinance could help make that debt less expensive to pay off. Say you qualify to refinance at 3% interest. And let's also say your credit cards are currently charging you an average interest rate of 14%. Clearly, it's more beneficial to you to pay off a loan at 3% than 14%. And also, squaring away your credit card debt could help your credit score improve by reducing your credit utilization ratio, which isn't negatively affected by your mortgage debt.
2. Covering medical bills or debt
It's an unfortunate fact that sometimes even people with good health insurance wind up on the hook for costly medical bills they can't afford (and those with bad insurance or no insurance are even more likely to get slammed with expensive healthcare bills). If you're carrying medical debt, a cash-out refinance could help you pay it off at a more affordable interest rate. And also, it could make that debt easier to manage. Say you're currently paying off three separate medical bills over time. With a cash-out refinance, you knock those bills out and then pay a single bill -- your mortgage -- going forward.
3. Putting a down payment on a car
A car is a reasonable thing to have, especially if you live outside of a city. If money has been holding you back from getting a car, a cash-out refinance could be your ticket to a new set of wheels. Having a reliable vehicle could open the door to getting a new job, earning a generous side income (if you decide to drive for a rideshare company or pick up shifts as a delivery driver), and having easier access to essentials, like supermarkets and pharmacies.
4. Making home improvements and repairs
Maybe you have a few big renovations on your radar but lack the cash to pay for them. In that scenario, a cash-out refinance could be a good solution, especially given today's affordable rates. Improving your home can do more than just make it more comfortable -- it can also add resale value to it. So if you've been waiting to finish your basement for extra living space or expand your tiny kitchen, a cash-out refinance could make that possible. Similarly, if there's a big home repair you've been putting off due to a lack of money, a cash-out refinance could help you address that issue quickly before it worsens.
Should you do a cash-out refinance?
There are risks associated with a cash-out refinance. If you take on a larger mortgage and have a hard time keeping up with your payments, you could risk losing your home. But if you can swing those higher payments, a cash-out refinance could help you meet other important money-related goals.
If you're not sure how much of a monthly payment you can handle, you can use this mortgage calculator to run the numbers by putting in your loan amount (in this case, your existing mortgage balance plus the amount you'd be looking to take out in cash), its term, and the interest rate you think you'll get. Here's a snapshot of what refinance rates look like today. Having that information will help you decide whether a cash-out refinance is right for you.
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About the Author
Maurie Backman writes about current events affecting small businesses for The Ascent and The Motley Fool.
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.
