Cash Out Refinance, Who Me?

Owning a home is a large part of the American Dream. We work hard to save for the down payment, and we continue to work hard to make the payments on time, and to build equity as we go. Equity in a home is the difference between the value of the home and what you owe on it. Having equity in your home is like having an extra savings account. There are three ways to build equity in your home. You build equity in your home by paying down the principal on your loan, by making certain improvements that will increase the value of your home, and through appreciation of the home due to market conditions which lead to the value of homes increasing in your area.

When you have a home loan, there are any number of reasons that might lead you to refinance your home. If interest rates have dropped significantly since you purchased your home, it makes sense to look into refinancing in order to lower your interest rate. If you’re wanting to pay off loan off quicker, you might want to refinance to a shorter term, so you can reduce the number of years left to pay. IF you are able to reduce the term of your loan as well as the interest rate, you’ll get a double “bang for your buck” because of how much more of your money will go towards the Principal, therefore accelerating the rate at which you’re building equity. You might have an FHA loan with forever Private Mortgage Insurance (PMI) and want to switch to a Conventional loan, where depending on how much equity you have, you can either eliminate the need for PMI, or at least substitute the PMI for the type that can be taken off once you have at least 20% equity in your property.

OR, you might want to consider a cash out refinance, also known as a Home Equity Loan. You may be thinking, “why would I want to do that”?

There are any number of reasons, but you start by looking at the whole picture. If you can avoid or eliminate other debt by getting a cash out refinance on your home, it probably makes sense to do. In the State of Texas, if it’s your homestead, you can borrow up to 80% of the current value of your home. If it’s a second home or an investment property, you can borrow up to 70% to 75%of the current value. If you have a current loan on your home, then whatever you owe would be paid off with the cash out refinance, and you get the difference, which you can use to make improvements, consolidate other debt or even put some money in a savings account so that you have an Emergency fund to handle that “rainy day” when the need arises.

Here are some questions to ask yourself when considering a cash out refinance. Would it improve my monthly cash flow? What is the current interest rate on the credit cards or whatever else I would pay off, compared to the interest rate on the home equity, or cash out loan? Lastly, and most important, am I going to be better off financially in the long run, by eliminating or avoiding other debt? If the answer to one or all of these questions is “YES”, then I would strongly encourage you to take a serious look at a cash out refinance and see what it can do for you. Remember, it’s not about adding more debt, it’s about re-structuring what you’ve got in a way that makes sense. When you have the ability to do so, It just makes good financial sense to make the best use of the largest asset you have. You’ve worked hard for your home, maybe it’s time your home worked for you. You’ve taken good care of your home. When it makes sense, let it take good care of you.

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