Reasons for cash-out refi
The most common reason for getting a cash-out refi is to pay for home improvements, says Rick Sharga, chief marketing officer of Ten-X, an online real estate marketplace. It's a good way to use equity because you're adding to the home's value, he says.
Another popular reason to get a cash-out refi is to pay for college tuition, Sharga says.
Alternatives to a cash-out refi
Doing a cash-out refinance is one of several ways to turn your home's equity into cash. Other ways of converting equity into cash are:
- Home equity line of credit, or HELOC.
- Home equity loan.
- Reverse mortgage.
A home equity line of credit works like a credit card, using your house as collateral. You have a credit limit, just as you have with a credit card, and you can spend up to that limit. The interest rate moves up and down with the prime rate.
A home equity loan is a lump-sum loan with a fixed interest rate. Home equity loans aren't marketed as aggressively as HELOCs, which outnumber home equity loans about 4 to 1, according to CoreLogic.
A reverse mortgage allows homeowners age 62 and over to draw cash from their homes in various ways. The balance doesn't have to be repaid as long as the borrower lives in the home.
Which is right for you?
When you get a cash-out refi, you'll pay interest for the life of the loan, which could be 15 or 30 years. So, it's best to spend your cash-out refi money on a long-term purpose, such as for home renovations or to free up money for a down payment on a second home. If that describes your needs, find your best mortgage deal.
On top of that, it rarely makes sense to get a cash-out refinance at a higher interest rate than you're currently paying. If you can't snag a lower interest rate, it's often better to keep the current mortgage and take cash out of your home via a home equity loan or HELOC.
Similarly, if you want to spend the money on a shorter-term purpose -- to buy a car or consolidate credit card debt -- it's usually better to get a home equity loan or HELOC. Why? Because you'll pay those off faster, and your total interest paid will be lower.
But if you want to use your home's equity to pay off credit card debt, be aware that you ultimately could lose your home if you don't repay.