Home equity may be a simple concept, but it’s also a powerful tool! Equity is how much your home is worth, minus how much you owe on the mortgage. For example, if you owe $300,000 on your mortgage, but your home value has risen to $500,000, you then have $200,000 in home equity. Home equity builds over time, and it might be the answer to making your next financial goal a reality.
Today, many financially savvy homeowners are meeting their financial goals by tapping into their mortgage equity. Here is one great way you can benefit from cashing in the equity your home has built for you:
Loan Type: Cash-Out Refinance
A cash-out refinance is the refinancing of an existing mortgage loan, where the new mortgage loan is for a larger amount than what you currently owe, and you (the borrower) get the difference between the two loans in cash. Homeowners generally do cash-out refinances so they can turn some of the equity they’ve built up in their home into cash.
Example of how a cash-out refinance works
Here’s an example to illustrate: Let’s say you own a $500,000 house and still owe $300,000 on the current mortgage. (This means you’ve built up $200,000 in equity – a fancy word for ownership). Over the past few years you’ve racked up $50,000 of credit card debt, and you need the extra cash to pay it off once and for all. You could do a cash-out refinance to get that money. If you get a cash-out refinance, you will get a new mortgage loan worth a total of $350,000 (the $300,000 you still owe on your home, plus the $50,000 you’re going to take out in cash).
How can you use a cash-out refinance?
Typically, you can use the cash you get from a cash-out refinance on pretty much anything you want; paying down your credit card debt, purchasing a new investment property, taking a vacation, or even using the money to make home improvements, which can boost your home’s value in the future.
If you have high-interest debt such as credit cards, it may make the most financial sense to use a cash-out refinance to pay off this debt first because the interest on your credit cards likely exceeds the interest on your new loan. Make sure you do the math ahead of time (including all costs associated with the loan) so that you can make the best decision possible.
Give Tim McBratney a call today to help with a cost-benefit analysis.