You have equity in your home and you want to use it. While there may be a program that allows you to tap into that equity, it’s not always the right choice. Before you jump in and take the equity out of your home, learn which uses are best for your equity and which are best left alone.
Renovate Your Home
Perhaps the best reason to tap into your home’s equity is to invest right back into your home. If your home needs some changes, it may be best to use the money already invested in your home. This is especially true if you know the renovations will increase your home’s value.
Are you not sure if changes you want will increase your home’s value? Talk with a real estate professional or appraiser in your area. Let them know the changes you want to make. They can let you know if the changes will affect your value much or if you may not see much of a return on your investment.
If you do make changes that increase your home’s value, you just increased your equity almost instantly. This way you can have the same or a similar amount of equity as you work to pay the cost of those renovations off in your new loan.
Pay for College
College gets more and more expensive every year. If you don’t have enough set aside for your child’s college education, you may want to use your home’s equity to pay for it. Many people think of their home as a forced savings account. They have to make the payments every month if they want to keep their home. In exchange, they get to enjoy the appreciation the home makes, which gives them a return on their investment.
Paying for college out of your home’s proceeds is often a better option than taking out student loans. This is especially true if your child has to take out the student loans themselves. Graduating from college with a large amount of debt is daunting and can make it hard for your child to ‘grow up’ and move on to buy his own house in the future.
Buy Another Home
Some people like to take money out of their current home in order to buy another home. Whether it’s a vacation home or investment home, this is one of the least expensive ways to go about it. If you buy a home as an investment, you can use the proceeds of the sale of the new home to pay your cash-out refinance down or even off, depending on how lucky you get with your investment.
Even if you buy a second home or vacation home, you’ll likely get a much lower interest rate than you would with a mortgage on the second home or vacation property. Lenders look at second homes and vacation homes as ‘risky.’ They often charge higher interest rates and higher fees to make up for the risk of default that these loans pose.
Get an Emergency Fund
If you don’t have a liquid emergency fund on hand, it’s time to get one. You cannot predict when something is going to go wrong. If you need money now, getting it from your home’s equity can take time. If it’s truly an emergency, chances are that you cannot wait 30 – 45 days to have the cash in hand.
Planning for an emergency when you don’t need it is the best policy. You can refinance with a cash-out refinance and take the money out, putting it in a safe place, such as a savings account or money market account for a rainy day. This way you have the money if you need it. If you don’t, and you find that you can save the money yourself now, you can simply pay your loan’s principal down and you are right back where you started.
Finally, you can use your home’s equity to consolidate debt. You should only use this method if you know you won’t get yourself caught up in a lot of debt again. Remember, your credit card debt that you carried was unsecured debt. This means the credit card companies couldn’t take your home if you defaulted on the debt. Once you pay the credit cards off and wrap the debt into your home, though, your home is at stake.
Only use this option if you know you can afford the cash-out refinance’s payment beyond a reasonable doubt. You don’t want to get in over your head and then put your home at risk because of it. Oftentimes, though, this is a great way to get out of debt because the interest rate on a cash-out refi is often much lower than the interest rates that the credit card companies charge.
Give careful thought to the reasons you want to take a cash-out refinance. Do you have other options? Are you willing to put your home’s equity at risk? Can you afford the payments? These are questions you should ask yourself to make sure you are making the right decision.Click to See the Latest Mortgage Rates»