For just a couple of weeks, we had what might be the shortest refinance boom ever. Interest rates dipped into the 5% range, which got everyone talking about cash-out refinances to manage their debt. But was it really the best option? Let’s break down why this might have been more of a blessing in disguise.
Why a Cash-Out Refinance Might Not Be Right for You
When rates dropped, many homeowners considered a cash-out refinance. The goal was simple: consolidate debt and make monthly payments easier. But for most people, this wasn’t the best option. Here’s why:
- You Lose Your Good Mortgage Rate
If you have a mortgage with a low rate from just a few years ago, refinancing could double or even triple that rate. This means you’d be paying more on debt you’ve already been handling well.
- Higher Total Interest Over Time
A cash-out refi stretches out your debt, adding interest over more years. So, even if monthly payments seem smaller, you’re likely paying more to the bank in the long run.
- Better Alternatives Exist
Instead of locking into a higher rate for all your debt, other options could work better for managing specific debts, like credit cards or car loans.
Better Options for Your Debt
Refinancing isn’t the only way to free up cash and simplify your payments. These alternatives can put more money back into your life without adding to your mortgage balance.
1. Fixed-Rate Home Equity Loans
A home equity loan lets you tap into your home’s value without affecting your current mortgage rate. Unlike a HELOC, which is often adjustable, a fixed-rate home equity loan keeps your rate steady and predictable.
2. Balance Transfers to 0% Credit Cards
Got good credit? Consider moving high-interest credit card debt to a 0% APR balance transfer card. Even with a small transfer fee, the savings can be big. For example, transferring $10,000 at 25% interest to a 0% card could save over $2,000 in interest a year.
Use This “Break” to Get Financially Ready
With the refi boom gone (and possibly not coming back anytime soon), it’s a good time to look at other ways to get into better financial shape. Here are a few steps to consider:
- Improve Your Credit Score
Aim for a 700+ credit score. This isn’t just about looking good on paper; it can make a big difference in the types of loans and interest rates you qualify for. With a high credit score, your monthly payments on things like credit card debt could drop by hundreds of dollars.
- Reduce High-Interest Debt First
Focus on paying off higher-interest debts like credit cards and personal loans first. Lowering your overall interest costs frees up cash each month.
- Use Tools to Compare Options
Tools like our free calculator let you compare a refinance vs. a home equity loan, so you can make the best choice for your needs.
Keep Debt Working for You, Not the Other Way Around
Debt doesn’t have to weigh you down. By choosing the right kinds of debt, you can focus on what matters now and build a solid future. Here are some tips for keeping debt manageable and beneficial:
- Aim for “Healthy” Debt
Debt can help you buy a home, car, or even fund a vacation. But always aim for manageable, “healthy” debt — the kind that supports your goals without stretching you too thin.
- Focus on Debt That Lets You Enjoy Life
Good debt isn’t about giving more to the banks; it’s about keeping more in your pocket. Imagine saving hundreds each month by switching to better debt and putting that money toward experiences you enjoy today and security for tomorrow.
The Bottom Line: Say Goodbye to the Refi Boom & Hello to Better Choices
The shortest refinance boom ever was, in some ways, a wake-up call. Yes, refinancing sounds appealing, but it’s not always the best path to financial freedom. Instead, use this moment to find better debt options, boost your credit score, and put more money back into your life.
For tips on finding the best debt solutions, visit us at Smart with Debt, where we guide you on smarter ways to handle your finances and keep your future bright.
Watch our most recent video to find out more about: The Shortest Refinance Boom EVER – Good or Bad For You?
