You have equity in your home and you qualify to get a cash-out refinance. Should you use it or leave it alone?
There are good uses for a cash-out refinance and there are some that are ‘not so good.’ Keep reading to find out the best uses for your home equity.
Invest Back in Your Home
The best use of your home equity funds is to put the money right back in your home. Are you planning a home renovation? Whether it’s large or small, certain home improvements can increase your home’s value. This will give you the equity right back in your home.
Because not all home improvements increase your home’s value, you should focus on the areas that do make a difference. Once you do, using a little of your home equity on improvements that may not have as much of an impact can be okay too.
The areas of your home that renovations often have the best result include:
- Living areas
- Home’s exterior
Before you panic, don’t assume you have to make ‘large’ renovations in order for them to make a difference in your home’s value. Even small kitchen or bathroom renovations can increase your home’s value. Even changing the color of your home’s exterior or fixing the windows can have an effect on your home’s value.
It’s a good idea to talk to a real estate appraiser about your intended changes to see how they may affect your home’s value.
Invest in Another Home
Have you always thought about investing in real estate? If you don’t have cash, but you have equity in your current home, you can use that money. While it’s not money in your current home, it can still be a good investment.
Before you buy an investment home, do your research. Don’t focus on the home itself, but also on the areas around the home. Is the neighborhood one that people like to rent houses in? Do homes sell fast in the area? These are questions you’ll want to know before you make a decision. Also, what you intend to do with the home will make a difference. Do you plan to fix it and flip it? Do you plan to hold onto it and rent it to tenants? These answers will also help you in your quest for answers.
Other Uses for Home Equity
You can use your home equity for other uses as well, but they won’t have as much of an effect as using the funds on real estate might. They include:
- Get out of debt – Are you in over your head in debt? You may want to use your home’s equity to consolidate it. Before you do, though, make sure you understand that you put your home at risk. Your unsecured debt becomes secured by your home when you use your home’s equity.
- Pay for college – Have you exhausted all of your options for student aid? You may want to use your home’s equity to pay the remainder of the college costs. The interest may be lower than you could get on a personal loan.
- Take a vacation – Have you always dreamt of going to Hawaii or taking a week long cruise? If you can’t pay for it out of pocket, you may use your home’s equity. Make sure you’re financially secure in all other areas of your life before doing this, though, as it’s purely a luxury.
- Use for retirement funds – Many people keep their home equity to use for retirement. Whether you take the equity out with a standard home equity loan or you take a reverse mortgage, you can use the funds while you are still here to use them.
Using your home equity can be a good way to use your funds. Before you do, exhaust all other options of financing your endeavor. Also, make sure you think the process through. Can you afford the higher payments? Is the interest rate worth taking the funds? Will you lose a great interest rate that you currently have on your mortgage? Think about these questions carefully can help you decide the best use for your cash-out refinance funds.