It's not inherently "dumb," but a cash-out refinance is only smart if the funds are used strategically (investments, high-interest debt consolidation, value-adding renovations) and you can manage the increased debt, longer loan term, and closing costs; otherwise, it's risky, potentially increasing interest paid and foreclosure risk. It depletes home equity, so assess your budget, goals, and credit before committing to a larger mortgage.
Key takeaways
A cash-out refi is a good idea if you want a lower interest rate, different home loan type, or if you want to pay off your loan amount faster.
You owe more money
Because you're taking out a larger loan amount — the remaining balance on the original mortgage plus cash out — your overall debt load will increase. A larger loan might also increase your monthly payments, depending on what rate you get and whether you refinance to a shorter or longer loan term.
The "2 rule for refinancing" usually refers to the 2% interest rate rule, suggesting you should only refinance if the new rate is at least 2 percentage points lower than your current one to recoup closing costs quickly, but this is just a guideline, as a 1% drop can be worthwhile, especially if you plan to stay in your home long-term or want to switch to a fixed rate. Another "2 rule" involves the 2-year review, recommending you check your home loan every couple of years to ensure you're not overpaying, as rates and your financial situation change.
The most effective method is making extra payments directly toward the principal. Even small additional payments can cut years off your loan, but if your goal is to pay it off in half the time, you'll need to be aggressive. Ultimately, the best approach depends on your financial situation.
Making an extra mortgage payment each year could reduce the term of your loan significantly. The most budget-friendly way to do this is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, you'll have paid the equivalent of an extra payment by the end of the year.
To pay off a $400k mortgage in 5 years in Australia, you need aggressive strategies like roughly $6,900 monthly payments (at 5.5% interest), achieved by increasing income, slashing expenses, using offset/redraw accounts for interest savings, making extra principal payments, and switching to fortnightly payments to effectively add an extra monthly payment annually. Refinancing for a lower rate and applying all windfalls (bonuses, tax returns) directly to the principal are crucial steps to accelerate debt reduction and save significantly on interest.
While it's possible that interest rates could return to 3% territory in the future, it's highly unlikely that it'll happen anytime soon. In fact, some experts say it won't happen again without another major economic shock like the one caused by the COVID-19 pandemic.
If your original mortgage is your oldest account, closing it for a new loan may impact your credit scores. As your other accounts age, the impact of a refinance on your credit scores will generally lessen.
A $400,000 mortgage at 7% interest typically costs around $2,661 per month for a 30-year term, while a 15-year term would be significantly higher, around $3,595 per month, excluding taxes, insurance, and fees, with the longer term resulting in substantially more total interest paid over the life of the loan.
Your payment history accounts for 35% of your credit score, making it the most important factor. The later the payment, and the more recent it is in your credit history, the bigger the negative impact to your score. Plus, the higher your score is to start, the worse of a hit it will take.
If your mortgage rate is higher than currently available refinance rates, a cash-out refinance may help you lower your rate. If your mortgage rate is below currently available refinance rates, a home equity loan may be a better choice.
If, over time, a cash-out refinance would cost more than keeping your current mortgage (on top of having to pay the extra interest from the cash-out refi), it may not be a wise financial decision. Of course, if you need the money for health care, tuition, or another necessary expense, you may not have a choice.
With a rate-and-term refinance, your equity stake shouldn't change, as you're only replacing your current mortgage with a new one. But a cash-out refinance involves borrowing against your ownership stake, which does reduce your equity.
Refinancing your mortgage is usually worth it if you're planning to stay in your home for a long time. That's when a shorter loan term and lower interest rates really start to pay off! Find a Mortgage Lender You Can Trust!
Closing costs – A cash-out refinance comes with closing costs comparable to your first mortgage. Typically, you can expect to pay between 2% and 5% of the loan amount. So on a $200,000 home loan refinance, you could pay between $4,000 and $10,000 in closing costs.
Improving your credit in 30 days is possible. Ways to do so include paying off credit card debt, becoming an authorized user, paying your bills on time and disputing inaccurate credit report information.
There are several good reasons to refinance your mortgage. Some people do it to lower their monthly payments by locking in a better interest rate. Others want to shorten their loan term, change from an adjustable-rate mortgage to a fixed one, or even tap into their home equity with a cash-out refinance.
Every time a lender reviews your credit report, it creates a hard inquiry. Each hard inquiry can lower your credit score by a few points, and these inquiries stay on your report for two years.
Experts' interest rate prediction for 2025 suggests that while rates may decrease, they may not drop significantly. According to some financial institutions, the average 30-year fixed mortgage rate could settle between 5.5% and 6.5% by mid-2025.
At the time of writing (January 2026), the average monthly repayments on a £70,000 mortgage are £369. This is based on current interest rates being around 4%, a typical mortgage term of 25 years, and opting for a capital repayment mortgage. Based on this, you would repay £110,846 by the end of your mortgage term.
Mortgage loans are amortized, which means payments are structured so that early installments mostly go toward interest, while later ones pay down more principal. As a borrower, it's important to understand how amortization works to see how your payment mix changes over time.
Using this free income calculator, the approximate income you need to buy a $500,000 home, assuming you need a $400,000 loan, is $77,000 gross per year, excluding superannuation.
The 50/30/20 rule in Australia is a simple budgeting guideline that suggests allocating 50% of your after-tax income to essential living costs (needs), 30% to lifestyle expenses (wants), and 20% to savings and debt repayment, though many Australians find they need to adjust it due to high living costs, sometimes shifting towards 60/20/20 or similar ratios.
Data collected by NASDAQ suggests that while only 28% of homeowners below retirement age have paid off their homes, nearly 63% of those 65+ have done so. These statistics highlight Americans' importance in entering retirement with freedom from what is usually their highest monthly fixed cost.