Could your home use a major update? Maybe you’re looking to consolidate high-interest debt. Is there an investment opportunity you’re looking to free up some funds for?
A cash-out refinance could help you accomplish your goals. Rates have been holding steady at fairly low levels lately, but no one knows how long that will last. If you are considering taking advantage of the value in your home, consider applying for a cash-out refinance now.
Before we fully dig into the benefits, let’s touch on the basics.
What Is a Cash-Out Refinance?
For most people, their home is the highest-value asset they own. Financially savvy people know how to make their assets work for them. You shouldn’t be any different.
A cash-out refinance allows you to convert the existing equity in your home into cash that can help you accomplish your financial goals. You gain equity, which you can think of it as your ownership stake, in two ways:
- The value of your home increases (The market is in an upswing.)
- You make your mortgage payment, paying off the balance a little bit more each month.
A cash-out refinance isn’t the only home equity loan option out there, but for many people, it’s the best. It has a couple of distinct advantages.
Unlike other options to utilize your home equity, a cash-out refinance is based on your primary mortgage as opposed to a separate, second loan or line of credit. This means you’ll get a better interest rate because the lender gets the first position on your title. This lowers the risk for the lender and mortgage investors because they get paid first if you run into trouble and default.
The second advantage to taking cash out of your primary mortgage rather than getting a second loan is that you only have to worry about one monthly payment. That can help with your budgeting.
These differentiators give a cash-out refi the advantage over other loan options.
How Can a Cash-Out Refi Help You?
Now that we’ve gone over the things that can make a cash-out refi an attractive loan option, how might you use one to accomplish your goals? Here are just a few ways the value of your home might come in handy.
Home Improvement and Renovation Projects
We’ve all been there at some point. It’s time for an update. The shag carpeting and vertical stripe wallpaper must go. Maybe you need funds for a new roof. And everyone’s shower could be a little more spa-like, right?
Whatever your desires, with enough equity in your home, you can rub the magic genie lamp and make your wish come true. A cash-out refinance could help free up the funds.
If you have high-interest debt, a cash-out refi could be a particularly good solution. Consider the following. The average variable credit card interest rate is 17.72%.
While mortgage rates are not as low as they were, say, three years ago, the rates for a 30-year fixed mortgage are in the high 4% to low 5% range as of this writing.
The average American has credit card balances totaling $6,375. Over time, you could end up paying a lot more than that with interest, particularly if you’re making only the minimum payment every month.
One of the things you can do with a cash-out refi is get enough cash to pay off your credit card debts. In doing so, you roll that credit card debt into your mortgage balance and pay it off at a much lower interest rate.
Maximize Your Savings and Investments
The last great reason you might take a cash-out refi is to maximize your savings and investments. If your house has a ton of value, you can’t access that money unless you do one of two things: either refinance your home or sell it. Let’s look at the potential benefit of refinancing your house.
Let’s assume mortgage rates are in the low 5% range. Warren Buffett is often cited as saying that over the long term (10 years or more), the average return for the stock market is around 7%. You should only rely on this role if you’re a buy-and-hold investor in a broad market index. Year-to-year returns or those based on individual stocks can be much more volatile. However, if you invest in a broad index and have a decent mortgage rate, you can make more money by investing your cash rather than blowing your savings on one big check to pay off your house. It frees up your cash for other opportunities.
While that’s just one investment option, this strategy isn’t unheard of. Even Facebook cofounder Mark Zuckerberg has a mortgage so he can use his money for other things rather than having a substantial amount of money tied up in a home.
While 99.99% of us aren’t likely to become billionaires with a reported 1.05% interest rate on our mortgage, because interest rates are typically lower for mortgages than for most other loans, it can make sense to have a mortgage for most people. You can also write off the interest on your taxes.
With that in mind, you can use a cash-out refinance to build a college fund or boost a retirement fund. You can use it for building an investment portfolio. This can be flexible for your financial goals.
Is a Cash-Out Refinance Right for You?
Now that we’ve gone over what a cash-out refinance is and the benefits, it’s time to determine if this is right for you. There are really two questions you need to ask yourself in order to make that decision.
Do You Have Enough Equity to Accomplish Your Goal?
As a hedge against risk, one common requirement for a cash-out refinance is that you leave 15% – 20% equity in your home after the refi. Because of this, it’s important that before you take cash out, you determine whether you have enough equity to accomplish your goal, whether it be remodeling, debt consolidation or anything else.
The one option that doesn’t require you to leave any equity in your home is a VA loan, which allows you to take out up to the full value of your home, assuming you meet the qualifications. VA loans are only available for eligible active-duty military members, reservists, veterans and surviving spouses.
Are You Comfortable Using Your Home Equity for This Purpose?
Finally, you need to decide whether your goal is something you want to use the value in your home for. Let me break it down.
Although most states don’t enforce a minimum loan amount, when you get to mortgage amounts that are extremely low, it may make more sense to take out a personal loan by the time closing costs are factored in. While this may not be a factor if you already have an existing mortgage, it could come into play if you’re taking a small loan on a home that’s been completely paid off in the past.
Along a similar vein, some people who are close to paying off the mortgage might consider an alternative funding source if they don’t want to go through refinancing again. Our friends at Rocket Loans offer personal loans that may be helpful in this situation.
Does a cash-out refinance sound like it might be right for you? If you’re ready, you can apply online or speak with one of our Home Loan Experts at (800) 785-4788. If you still have questions, you can leave them for us in the comments below.