Mortgage Refinancing Options: Lower Your Payment, Cover Major Expenses, or Renovate Your Home

Although tapping into your home equity is a powerful borrowing option, you want to use it thoughtfully. The wisest cash-out refi options help you make meaningful progress toward your financial goals while balancing the costs and risks.

What makes a cash-out refi "smart"?

A cash-out refi can be a smart choice if you're using the funds to improve your overall finances or to achieve something you care about. It may be a smart use of your home equity if:

• You're replacing high-interest debt with a lower-cost home refi: You could end up paying less interest over time, lowering the total cost of your debt.
• It creates long-term value or helps build your savings: These uses result in having more resources to spend on what matters to you.
• It improves your monthly cash flow: This can make it easier to pay your bills, prepare for emergencies and save for the future.
• It aligns with your financial goals and life values: This helps ensure your decision supports what matters most to you, both now and in the long term.

Not all cash-out refinance uses offer the same advantages. So even if other homeowners commonly use cash-out refinances for a particular purpose, it's best to look at the pros and cons for your unique circumstances.

Tax implications can vary depending on how cash‑out refinance funds are used. Homeowners may want to consult a tax advisor to understand how using the funds could affect mortgage interest deductibility.

With these criteria in mind, here are five smart ways to use a cash-out refinance.

1. Paying off high-interest debt

If you're paying a high interest rate on credit cards or a personal loan, consolidating that debt may be a smart use of home equity.

Suppose you have $5,000 in credit card debt and your APR is 22%. If you pay it off over five years, you'll pay $3,286 in interest. Consolidating to a 6.5% APR and keeping the same payoff period reduces the total interest you pay to $870, although you'll also want to consider the cost of the refi.

Consolidating debt can also simplify your monthly bills, especially if you're juggling multiple credit cards and installment loans.

However, the downside to debt consolidation with a refi is that you're exchanging unsecured debt for debt that is secured by your home. If you don't make the payments, your home is on the line.

2. Funding home improvements that add value

Upgrading your home can be a wise use of equity if the updates boost your home's livability or increase its appeal to future buyers. For example, it may be worthwhile to remodel an unfinished basement to create a home office and a game room, allowing you to use more of your available space. Adding appliances and counters to your kitchen could make the room more functional so you can cook more often.

Some home improvements could increase your home's resale value, potentially growing your home equity. For instance, a HomeLight survey found that improving flooring adds $11,731 in value to a home on average. And according to Zillow, a new garage door adds $15,081 in value.

Keep in mind, though, that many renovations are simply cosmetic and don't enhance your property's worth. Do your research before deciding on a home upgrade.

3. Investing in education

It can make sense to draw on home equity to build your knowledge or skills. Maybe you just need a couple more credits to finish your college degree, and then you could look for employment in a higher-paying field. Or perhaps completing a professional certification would put you in the running for a promotion at work.

Education is potentially a good use of cash-out refi funds when it increases your earnings, like if you have a higher-paying offer lined up. If you're not yet sure how an academic credential would contribute to your career, consider other options before turning to home equity.

4. Building or replenishing an emergency fund

Starting or adding to emergency savings can be a wise use of a cash-out refinance if you need to stabilize your finances. According to a survey by Empower, 32% of Americans don't have an emergency fund. Having insufficient cash on hand can put your overall finances in jeopardy if you're forced to pull out a credit card each time an unexpected bill comes. Establishing an emergency fund may open a more sustainable way forward.

That said, borrowing against home equity comes at a cost, so it’s typically best reserved for situations involving a serious cash flow crunch. It only makes sense if you're disciplined about keeping savings in the bank until there's a true emergency.

5. Making strategic investments or major life purchases

A cash-out refi can help you achieve a goal like starting or expanding a business. That can be a good use of your funds if it leads to higher income later. Plan carefully before committing to any major investment or purchase. Some business ventures aren't viable in the long term, and you might not recoup your investment. Make sure you have a realistic understanding of the risks involved before tapping home equity.

Major life transitions like relocating, starting a family or adapting to a new medical diagnosis can also warrant spending refi funds. For example, if you're acting as caregiver for a parent who has limited mobility, you might use the cash to pay for a wheelchair-accessible vehicle.

Not all cash-out refi uses are worthwhile

Be mindful of financial tradeoffs when deciding how to use a cash-out refi. You may want to avoid making short-term discretionary purchases with the cash because you'd end up paying interest on them long afterward. Likewise, it often isn't wise to spend the funds on big-ticket items that are going to decrease in value significantly.

How to decide if a cash-out refinance is right for you

Follow these steps to evaluate if a cash-out refi makes sense for you.

1. If you're thinking of consolidating debt, compare the interest rate you're currently paying with the APR on the refi. Use an interest calculator to confirm whether you would save on interest over time.
2. If you're expecting an expenditure or investment to pay for itself in the future, consider how long it would take for that to happen. Be aware of the risks that things might not go as planned.
3. Look at how monthly payments would fit into your budget, and make sure you could pay them comfortably even if new expenses come up.

You might choose to split your refi proceeds between a few different purposes. In that case, you may want to pursue stability and debt reduction first and to consider investments or purchases once you've met those initial targets.

Ready to use your cash-out refi funds?

If you're ready to start the process of refinancing your mortgage, check out rates from Citizens.