Many homeowners have used cash-out refinancing as a way to use their home to pay off various forms of debt. Commonly, homeowners used this type of refinancing to pay down debts from sources like credit cards or personal loans, but there have been people in the past that use their home’s equity to pay off college debt or simply for personal expenses like vacations. Yet, dealing with debt is one of the main reasons homeowners use cash-out refinancing seeing as how it can be beneficial in erasing debt quickly.
Using cash-out refinancing has been a way to access capital from a homeowner’s equity without adding a second mortgage to a home. According to bankrate.com homeowners can avoid a traditional home equity loan, which is a separate loan on top of a primary mortgage, by using cash-out refinancing.
Yet, many financial advisors have cautioned homeowners against using cash-out refinancing since it can cause trouble. While there are homeowners who have used funds from cash-out refinancing to pay off their debts quickly, essentially cash-out refinancing is attaching unsecured debts, like credit card debt, to one’s home loan obligation.
Homeowners who have poor financial habits may find trouble down the road since they are increasing the amount they owe on their mortgage when using cash-out refinancing. Obviously, using cash-out refinancing is going to bring this unsecured debt to a secured debt source–a mortgage–and if a homeowner struggles to make payments they can lose their home.
There have been homeowners that have used cash-out refinancing to their benefit though, but it will take smart financial habits. Homeowners who quickly pay off debts, like credit card debt, with cash-out refinancing can get into trouble later, but if that homeowners is mindful of their spending habits and budgets wisely, then cash-out refinancing can be a way to pay off debts fast. However, many advisors warn that overall home loan costs will rise if a homeowner continues to make minimum payments on their mortgage, so some homeowners begin paying more on their home loan each month with money saved from paying off various debt sources outside of their mortgage.