Cash-out refinancing is when you refinance your mortgage for more than what you owe, but less than the total value of your home. For example, if your home is worth $300,000, but you owe $150,000 and decide to refinance your home for $200,000, that would be a cash-out refinancing because you can technically take the $50,000 over the value of what you owe in your home in cash. The two biggest benefits of taking a cash-out refinance of your mortgage are the money can help satisfy a big expense and help you better manage your debt.
#1 Help Pay for a Big Expense
A cash-out refinance is a way to tap into some of the equity in your home and obtain money for a large expense. The money you get from a cash-out refinance can be spent at your discretion; it does not have to be used to improve your home, although it can be used for that purpose.
Instead, the money could be used to help you start a new business. It could be used to pay for college tuition or job training. The money could also be used to pay off medical bills. The money that you get through a cash-out refinance doesn't have to be spent any particular way, which is the biggest benefit of this type of loan. You can use it to pay for a big expense without having to answer questions about that expense to your bank.
#2 Better Manage Your Debt
Some debt is better to have than others. A home mortgage is better to have than a bunch of credit card debt for example, because you can rearrange a home mortgage and refinance your debt. You can also sell your home to eliminate your mortgage if you need.
Credit card debt is not the best type of debt to have. The interest rates are generally high, and they can increase. Maxing out your credit cards has a negative impact on your debt to credit ratio, and carrying a high balance can bring down your credit score.
Taking the cash from a cash-out refinance and using that money to pay off your debt can save you money in the long run. It can allow you to get out of high-interest loans and credit cards. If you use that money to then change your financial life and not incur any more debt, you can even use the money to change your overall financial life for the long-term.
A cash-out refinance can help you pay for major life expenses, like home repairs, education, or starting a new business. It can also be used to consolidate and better manage your debt.