Ready to Refinance This Winter? Read This First
One of the best things about owning a home is that as you pay down your mortgage, your home builds equity that you can access should you ever need to (as long as you meet the loan requirements). You can access your equity through one of two ways, either through a home equity line of credit or a cash-out refinance.
For many homeowners, a cash-out refinance is a popular choice because it not only allows them to access their home equity, but it also gives them the opportunity to secure a lower interest rate than what they were originally paying or change their loan terms.
That said, while banks have no say on how you should use the money you get from your cash-out refinance, there are some uses that make more sense than others, and there are some uses that you probably shouldn’t even consider. Here is how to use a cash-out refinance wisely in the winter.
Why a Winter Cash-Out Refinance Can Be Dangerous
Winter is the part of the year when most gift-giving holidays are celebrated. So, it can be especially tempting to use some or all of the money you get from your cash-out refinance to enjoy an abundant holiday. After all, you are most likely walking away from your refinance signing with several thousands of dollars in your pocket and it can easily burn a hole in your pocket if you aren’t careful.
It is important to remember that the money you get from your cash-out refinance isn’t free money. The amount you take out is added to your new mortgage. If you are refinancing your home loan, which has a balance of $150,000, and you’re taking out $30,000 of your equity in cash, then your new loan will be for $180,000.
When you spend that $30,000, it’s gone but you still have to pay it back to the bank. So, if you splurge on the holidays instead of using the money wisely, then you basically just added $30,000 worth of debt to your life.
What Are Wiser Ways To Spend Home Equity Funds in the Winter?
Ideally, you want the funds that you get from your cash-out refinance to provide you with some type of financial benefit. Therefore, one of the wisest ways to use your home equity funds is to have home improvements done on your home. Home improvements increase your home’s comfort and quality and can instantly increase its market value.
Even if you aren’t planning on selling any time soon, any improvements you make on your home will increase its value, thus increasing again the amount of equity you have in your home.
Another good use for home equity funds is for investment purposes. For instance, you can use the funds to purchase an investment property. This is a wise way to use the money because the property will eventually provide you with a source of revenue.
Using the money to pay for college tuition or for continuing education purposes can also be worthwhile because the end goal of gaining more education is qualifying for a promotion, or landing a better, higher-paying job.
As you can see from these instances, each one provides you with some type of financial benefit, so your money is working for you. If you can use your home equity funds to improve your financial situation, either now or in the future, then that is money that is well-spent.
Should Home Equity Funds Be Used To Pay Off High-Interest Debt?
A lot of financial experts may tell you that using the money you get from your cash-out refinance to pay off higher-interest credit card debt is a good way to use it. But this doesn’t come without some serious risks.
For starters, your credit card debt is unsecured debt whereas your mortgage is secured debt. This means that should you default on your credit card payments, the worst that will happen is that your credit will be damaged and you will get harassing calls from debt collectors, but you won’t lose your home. On the other hand, should you default on your mortgage, then your lender will ultimately foreclose on your home.
Another risk of paying off credit card debt with home equity funds is that it restores your credit limits on those cards because their balances return to zero. If you are not disciplined, it can be all too easy to start using those cards again and you may find yourself back in the same situation, but now with a much larger mortgage.
Before Choosing A Cash-Out Refinance, Talk With Your Local Loan Officer
Your lender can’t tell you how to spend your money, but they can help you determine if your reasons for doing a cash-out refinance in the winter are reasonable or risky. So, before you start the process, schedule a sit down with your local loan officer and have a discussion about it. They will be able to guide you in the right direction, so you can make the best financial decision for your current and future needs.
