Taking Cash Out
If you have equity built up in your home and would like to convert that equity into actual money you can use, a cash out refinance may make sense for you. Keep in mind that cash in your home is not cash in your bank—until you qualify for it of course. Here are some key points on cash out refinancing.
What is a cash out refinance exactly?
A cash out refinance is when you are taking a new loan that is higher than the amount that you currently owe. The difference of your current loan amount and the new loan amount will be the cash out portion. For example, if your existing mortgage today is $200,000 and you needed $50,000 in cash out, you would simply get a new loan for $250,000.
When should you do a cash out loan?
A cash out refinance only makes sense when you need the cash. If you truly don’t need it, leave your home alone and use it for retirement. Here are a few situations where taking out cash makes sense:
- When you can use the cash in your home to consolidate other debts to lower your overall monthly payments
- When you have no other options for financing on larger purchases or investments
- When other financing cost too much compared to the cash out interest rate you could obtain on your loan
What can you use the cash for?
Hey, it’s your money, you can use for whatever you like. Like it has been stated above, cash in your home is not cash in your bank, until you qualify for it. So, once you have gone through the process and are able to qualify for it, this money is yours and you are free to so what you like with it.
Here are some common reasons for cashing out:
- Home Improvements
- Paying off student loans
- Purchasing an investment property
- Paying for emergency expenses
- Elderly Care
- Debt Consolidation
Now you’ve got to be careful not to spend this money on short term expenses. Keep in mind you are taking out money that you will be repaying over a 30-year term so paying off short term debts really wouldn’t make sense. Also, if you are paying off credit cards, make sure you don’t go back out and charge the cards back up again, this would defeat the purpose of paying them off to start with.
What are some other benefits when taking cash out?
Well good question. One very good reason to take cash out to make investments is the fact that you are borrowing money for very low and if you can get a higher return on your investment, then this would be a good idea. For example, if you are planning on opening a business and you need $50,000 to do so, you have to determine if your return will be higher than the cost of the cash out loan. If your new cash out loan has an interest rate of 4% but your new business will yield more than 4% return on your money, than it would be worth it to do so. The wealthy get wealthier because they use other people’s money to create that wealth. In this case, you would be borrowing money to create more wealth for yourself.