If you are thinking of cashing out some of the equity you have in your home, you should know the best uses for those funds. Not all uses are created equal. In fact, there are some bad reasons to take money out of your home.
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Keep reading to learn the top reasons to use your cash-out refinance proceeds.
Fix up Your Home
If you are going to take the funds from your home and reinvest them right back into your home, it’s about the best reason you could have for a cash-out refinance. If the changes you are going to make to your home will increase its value, you just helped yourself for the future. The higher value means you’ll gain a little equity now and have more equity once you pay the principal balance back down to where you started.
Remember that not all home improvements have an effect on your home’s value. If they do, it could be a minimal change. Try to focus on improvements that have the best return on your investment, such as:
- Kitchen remodel (can even be minor)
- Bathroom remodel
- Painting the interior or exterior of the home
- Replacing/changing the flooring
- Enhancing the home’s curb appeal
If you are unsure if your planned renovations will increase your home’s value, talk to an appraiser or licensed real estate agent to get their opinion.
Buy Another Home
Are you interested in investment real estate? You might think you could never start because you don’t have money to put down on the property. If you have equity in your primary residence, though, you may be able to use those funds for the down payment.
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While the funds won’t be invested in your home, you still invest them in real estate. As long as you buy a property that has potential, meaning you’ll be able to either rent it out or flip it, you should make money on the deal. Using your cash-out refinance proceeds can be the starting point you need to make a lucrative income in real estate investing.
Get out of Debt
This one can be tricky. Yes, consolidating debt can be freeing and it can even save you money. But if the debt you consolidate is unsecured debt, you suddenly make it secured by wrapping it into your mortgage. You now put your home at risk if you can’t pay the mortgage.
It can make sense to use your cash-out refinance proceeds to get out of debt though, if you can lower the interest rate that you are paying. Let’s say you have a few credit cards, each with interest rates over 20%. That’s a lot of interest to pay. If you are only making the minimum payments, you’ll never get yourself out of that debt. If you use your cash-out refinance proceeds to pay the debt off, you will likely have a much lower interest rate. While you’ll probably also have a longer loan term, you’ll free yourself of the hold credit card debt can have on you.
Make sure that the debt you pay off does have a high interest rate and that there’s no other way out of it. For example, if you have federal student loans, you may want to inquire about student loan forgiveness, which can wipe the debt off your shoulders before it’s paid in full. If you pay the debt off with your loan’s proceeds, you lose that benefit and end up paying the full amount.
Pay for College
If you’ve exhausted your options for financial aid for your child’s education, you may use your home’s proceeds to pay for it. While it may not be what you imagined you’d use it for, it can be less expensive than taking out student loans.
The average college graduate leaves college with almost $40,000 in debt. That’s a tough way to start a new life with heavy debts on their backs. If you can help your child by using your home’s equity, you may save both of you a significant amount of money over the years.
Using your home’s equity should be something you consider very carefully. Just because you have the money doesn’t mean you have to use it. Make sure you exhaust all other options and ensure that you will save money on interest and fees by using your home’s equity rather than an alternative available to you today.
