The Road Map for Home Ownershipadmin
Let’s discuss when it’s right to turn your home equity into Cash.
Is it Right for You?
Owning your own home is not just a fundamental aspect of the American Dream. For many American households, the equity in their homes represents as much as 67 percent of their total net worth. For generations the power of home ownership has created a solid financial base for millions of families, and a little knowledge offers the potential for even more financial independence.
Building Long-term Value
Most people understand that the total equity in their home represents the current market value minus the balance of the underlying mortgage. The initial equity balance usually starts with the down payment, and equity value generally grows over time due to a combination of factors. These include:
Improvements made in the home
Paydown of principal from monthly mortgage payments
Overall increase in market value
While this growth in equity provides an overall sense of comfort, it may also provide some significant financial opportunities. One of the fundamental principles of financial management is to keep your money at work earning the best possible returns. While the equity in your home is working for you, it can also be leveraged to provide even more financial benefits.
Putting Risk versus Reward to Work
Loans on primary residences are considered relatively safe bets by financial institutions. That is why mortgage rates are significantly lower than most other consumer loans. Likewise, it generally means you can access your equity with a cash-out refinance.
If you have equity in your home, you can usually take advantage of an equity line of credit or loan. However, the rates on such loans are higher than regular mortgages because they represent more risk to the lender. That risk comes from being second in line behind the primary mortgage holder.
On the other hand, the cash-out refi replaces the original mortgage and assumes the first position on your home. Depending on your specific situation, you may end up with lower or very similar payments due to changes in interest rates and other factors. Our experienced loan advisors can quickly help you evaluate your options in this area.
Taking the time to consider a cash-out refinance may open a variety of financial doors for you and your family. We have assisted clients put their equity to work in many ways, including:
Eliminating debt with much higher rates
Simplifying their financial picture by consolidating multiple payments into one
Starting a business without seeking outside lenders and investors
Diversifying their investments into such things as stocks, rental properties, etc.
Helping with unexpected or other major needs such as medical and education
In light of the new tax changes, your advisor may show you just how much additional financial leverage a cash-out refi may provide you. For example, consider the savings of replacing just $16,000, which is the 2017 average for U.S. Households with credit card debt, carried at 18% for ten years. (https://www.nerdwallet.com/blog/average-credit-card-debt-household/))
A refinance mortgage that gives you that $16,000 to pay off the credit cards with a 4.5% mortgage would save nearly $15,000 over those ten years. That is called a savvy financial strategy, even before adding in the potential returns from investing that “extra” $15,000.
As the song says, “You work hard for your money.” Let us help you put that money to work for you by exploring the advantages of a cash out refinance on your home.