Refinancing Your Home: Is It Time?

Owning your home comes with many great benefits. It certainly is the biggest asset for most people.

Building equity through appreciated value is a lot like having a savings account — savings that are available to you as a cash-out refinance. This is nothing new; homeowners have always been able draw on the equity in their homes.

Americans own more than $25 trillion in real estate, but only have mortgages on about $10 trillion, according to a recent Freddie Mac report.

That means up to $15 trillion is available for other purposes. The same report found that about $14.7 billion of that equity was drawn on in the last of quarter of 2018. While homeowners took advantage of billions, trillions were still available in the form of  a cash-out refinance. 

The average annual equity gain per homeowner was $6,400 from January 2018 to January 2019, according to CoreLogic. 

That’s a lot of untapped money. 

Reasons People Use A Cash-Out Refinance

Digging further into the Freddie Mac report shows that 40% of those who completed cash-out refinancing used the money to pay off other debt, especially debt held at a higher interest rate.

A full 31% improved their homes with additions — new construction — or made repairs.

With interest rates on a cash-out refinance so low, 14% moved money to savings for even faster access when needed.

Also taking advantage of low interest rates: borrowers with hybrid ARM mortgages. A full 94% of people with ARMs used it to move into a fixed-rate loan late in 2018.

Other home equity uses included 9% who bought autos and major appliances. College costs received another 7%, and 6% was invested, including into the businesses owned by borrowers. 

Use It Wisely 

Some people completing a cash-out refinancing choose to use the cash for a big vacation or to pay off credit cards.

Before doing this, consider that human nature seems to favor running credit card debt back up in a short period of time. Only you know if that is a wise use of your home equity.

The same goes for a big vacation. You’ll be paying for that vacation for the next 20 or 30 years if it’s part of your mortgage.

If constantly growing equity excites you, a major home remodel is probably a wiser use of a cash-out refinance.

Your remodel project doesn’t always immediately increase the value of your home. But if you’re planning to live there a few more years, you gain the benefit of enjoying the remodel while your home continues appreciating in value.

Real Estate Investing, College Costs Make Sense

Unlike credit cards and vacations, paying off a car does make sense — as long as you don’t just trade up for another car payment. Paying off high-interest college loans is also wise, since that monthly bill will go away forever.

Since you understand the value of increasing equity, another real estate investment could be your path to growing your wealth. It does come with some risk, but using the equity in your family home could cover the down payment on a house that you rent out or flip for a profit. Wealth is built on taking well-calculated risks.

Now is a great time for a cash-out refinance — just be sure you do it wisely.