If you are like many U.S. homeowners, you are entering the New Year with higher property values and, depending what part of the country you live in, with dreams of higher temperatures as post-holiday winter weather hits. Then again, you may be more intent on making improvements to your home in anticipation of a "staycation" later this year. In either case, as well as those involving milestone events like family reunions and college tours, a cash out refinance may make your goal more affordable.
Why This Makes Sense
A cash out refinance involves accessing the equity that has built up as your home’s value increased over the last few years and you’ve repaid the principal portion of your mortgage. This amount builds within your home as equity while you continue to pay the same mortgage amount each month. That equity would be freed up if you were to sell your home, but there is also another way to access it.
Replacing your current mortgage with one of a higher value gives you access to the money built up via your home’s equity. Depending on the current interest rate environment, a refinance can sometimes even be done at a lower rate. When that occurs, your monthly payment may remain close to the same as your current payment even though you have a larger mortgage.
If you currently have a shorter-term loan or adjustable-rate loan, you may also find that a cash out refinance may also benefit you. In these situations, you can refinance into a fixed-rate mortgage ahead of an expected rise in interest rates and/or lengthen the term of your loan, which could potentially lock you into a lower monthly payment than you might otherwise have had.
Regardless of the circumstances, when you refinance using a cash out loan option, you receive a cash payment that can be used for any purpose you would like, including achieving other financial or life goals.
Cash Out to Achieve Other Goals
- Retire student loans
- Finance a wedding
- Buy an investment property
- Put a down payment on a vacation home
- Pay off medical bills
- Help offset elder-care expenses
- Make home improvements
- Pay down credit card debt
- Take a once-in-a-lifetime trip
- Start a new business
- Pay for a child’s education
Borrowing From Yourself
The preferred use of a cash out refinance is one that improves your financial situation—such as paying for home improvements that might further boost your home’s value, starting a side business, or repaying higher interest debt like student loans or credit cards. However, the extra cash also enables you to invest in experiences that will improve your family’s quality of life and create lasting memories.
That might mean a vacation property that your family can enjoy for years to come through a timeshare, fractional ownership program, or the outright purchase of a vacation home. Many such properties, especially second homes, may offer the added advantage of being an investment with the potential to create a small stream of rental income when your family isn't using them.
While escaping to warmer weather is a goal many share, the versatility of a cash out refinance allows you to accomplish any number of goals by essentially borrowing from yourself to pay for improvements that can have lasting impact on the quality of your family's life.