When planning a refinance of your home loan, you have two options: to refinance for just what you need or to refinance for more than you need and take out some cash. The second option, known as a cash-out refinance, should be weighed carefully, as it adds to the amount due on your loan. But it can also be an excellent choice to pay for a number of situations.
What are some of these good choices? Here are five things that may be ideal uses for the cash available in your home and why.
1. Home Repairs
The first, and probably the most common, use for cash-out refinancing is to pay for repairs or upgrades to the home itself. This makes sense, as the house essentially pays for its own maintenance or improvements.
Because major home repairs are some of the biggest sudden expenses many families face — such as up to $30,000 for a new roof — stretching them out over the life of a 15-, 20-, or 30-year mortgage makes them manageable. Updates and improvements may also increase the value of the asset (the home) you have financed, possibly creating even more equity in the future.
2. Debt Consolidation
Do you carry high-interest debt on credit cards or through other loans? Getting rid of them may be a great use of cash-out refinance money for two reasons. First, the mortgage interest rate is often much lower than credit cards or short-term loans, so you can save a lot of money. Second, consolidating the loans makes payments easier to keep up with.
However, a danger exists that a person will charge up those credit cards again after paying them off with the refinanced funds. This might result in little benefit since the home is now more at risk due to the larger loan. If you want to consolidate using a refinance, take steps to ensure that revolving debt doesn’t come back.
3. Education Expenses
Just like investing in your home is a good use of the equity in your house, investing in your own or a child’s future may be a great use. Low-interest mortgage loans often rival the cost of public student loans, but the mortgage terms are often more attractive — not the least of which because student loans are non-dischargeable. And the interest rate of a refinance is usually much better than that of private student loans.
4. Emergency Needs
Could the equity in your house serve as an emergency fund? Many Americans find it extremely difficult to build up an emergency fund in case of serious medical bills, accidents, or job loss. If you find yourself in this position, it may make sense to tap into the unused equity in your house to stabilize your finances if something goes wrong.
A homeowner could do this either by completing the refinance now and placing the money in a separate emergency fund or by planning a refinance when the need arises.
5. Investment Property
Finally, if your household finances are in good shape, consider using refinancing as a means to build a generally stable investment. A growing number of homeowners have become landlords by purchasing a rental property. This could bring you a lifetime of extra income with relatively little ongoing work.
Unfortunately, getting approval for a second mortgage for a rental home is difficult. Those who can use significant equity in their first house may find this method much easier to complete.
Want to know more about doing a cash-out refinance for one of these useful reasons? Start by meeting with the finance pros at Dominion Capital Mortgage Inc.. Our team will answer your questions and help you assess the costs and benefits of taking cash out of your home. Call today to make an appointment.