Markets

3 Reasons to Consider a Cash-Out Refinance Today

A mom, dad, and their young daughter painting the wall of their living room blue.

Image source: Getty Images

A lot of homeowners are refinancing their mortgages these days, and for good reason. Mortgage rates have fallen to historic lows, and while refinance rates are higher than those associated with purchase mortgages for new homes, they're still extremely competitive. And if you're going to refinance, you may be considering a cash-out refinance instead of a standard one.

With a cash-out refinance, you borrow more than your remaining mortgage balance. For example, if you owe $150,000 on your home, you might instead get a new loan for $170,000. From there, you'd have the option to use that extra $20,000 however you please.

To be clear, taking on additional debt comes with risk, so if you're going to do a cash-out refinance, there should be a good reason for it. But here are three scenarios where a cash-out refinance likely makes sense given today's low rates.

1. You want to improve or repair your home

If you need to sink money into your home that you don't have in cash, you have several options. You could borrow against your home via a home equity loan or line of credit, you could take out a personal loan, or you could even charge your expenses on a credit card (though the latter option is definitely not recommended because credit cards have extremely high interest rates). But in all of these cases, you'll likely pay a lot more interest on the amount you borrow than you will on a cash-out refinance, given today's rates.

Of course, this assumes that your credit score is high enough to qualify you for the best mortgage refinance rates out there. But if you're sitting on a score that's in the mid-700s or higher, there's a good chance you'll get a stellar rate on your refinance.

2. You want to consolidate debt

If you have existing debt -- say, a couple of credit card balances plus a personal loan -- then you could use a cash-out refinance to consolidate that debt and pay it off at a lower interest rate. In this situation, you'd take extra money out of your mortgage, use it to pay off your various debts, and then simply repay your new mortgage. You'll save money on interest, and you'll also make just one monthly payment instead of several, which decreases the risk that you'll forget to pay a bill and get dinged for it.

3. You want to buy yourself some financial breathing room

Many people are sorely lacking in emergency savings, and given the state of the economy today, that's a scary place to be. If you have very little money in the bank, a cash-out refinance could help you pad your savings and buy yourself some wiggle room in the face of unplanned bills. Of course, in an ideal world, you wouldn't borrow more money just to put it in savings. But given how low refinance rates are, right now, it makes sense to have that cushion.

A cash-out refinance isn't something you should jump into. Rather, make sure to weigh the pros and cons. The upside? More money to use as you need or please. The downside? More debt -- debt that could lead to foreclosure if you fall behind on it. But if you have a good reason for doing a cash-out refinance, then it could really pay to take advantage of the low rates that are available today.

Today's Best Mortgage Rates

Chances are, mortgage 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. Click here to get started by scanning the market for your best rate.

The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. 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 views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More