How To: Make
Your Money Work for You with Cash-Out Refinance Funds
Whether you just bought a new home or have been an established homeowner for years, chances are you’ve heard of refinancing as a viable option to make your property more affordable. But did you know that you can refinance to tap into the value of your home and gain money to put toward just about anything?
It’s possible
with cash-out refinancing. Let’s take a few minutes to explore just some
of the many opportunities you’ll have with cash-out refinance funds.
What is a
Cash-Out Refinance?
Simply put, a cash-out refinance is when you replace your current mortgage with something bigger and take the difference in a lump sum of cash.
An example: you have a mortgage with a remaining balance of $170,000 and get a new loan of $200,000 with a cash-out refinance. This would leave you with $30,000 in cash to put toward anything you want!
Of course, it’s
important to remember that you’ll still have a mortgage to pay off after
cash-out refinancing. Since you’ll increase your loan amount to include the
cash you’d like to take out, your mortgage payment may be slightly higher;
however, if you’ve already paid down a significant amount of your loan, the
difference in payment may not even be noticeable. The amount of cash you get
from this type of refinancing will also depend on the value of your home, the
lender you do business with and more – so be sure to review your financials and
speak with an advisor to determine whether cash-out refinancing is the right
option for you.
Now that we’ve
covered the basics, it’s time to see some of the best ways you can utilize
cash-out refinance funds as a long-term source of income.
Invest in
another property
Depending on the
amount of cash you get from refinancing, you can invest in a secondary property
that could provide reliable income for years. This could be as simple as owning
a single-unit apartment or more involved with properties like multi-family
homes. Regardless, renting out space is almost never a bad idea if you’re
looking for passive income – and cash-out refinance funds can get you there.
Here’s a couple of ideas with proven success to get you started:
- House Hacking: invest in a multi-family
home and live in one of the units, using the passive income generated by your
tenants to pay off your mortgage. Normally this is done at a primary residence,
but the same principle still applies; you can use the cash-out refinance funds
from your primary home to purchase a second rental property as a source of
income. Learn more about the benefits of house hacking here. - The B.R.R.R.R. Method: buy, rehab, rent,
refinance, repeat – a great method for those interested in building wealth with
a more disciplined approach to real estate. If you have the funds available to
you, you may consider buying a home, making renovations, renting it out,
refinancing it when the time is right, and using those refinance funds to do it
all over again. In the right circumstances, the B.R.R.R.R. Method can be a
great source of income that grows with each property purchase. Learn more about it
if you’re interested!
If you do choose
to dedicate your cash-out refinance funds to property investment, be sure to
consider the same things you did when you purchased your first home. Proper
care and a great location will go a long way when your listing is on the market
– and if your investment property checks all the boxes, it’ll offer reliable
monthly income for years.
Consolidate
your debt
Among the most popular uses of cash-out refinance funds is debt consolidation – the act of moving high-interest debt to long-term, low-interest debt to save on interest in the long run. This is a great option for those who may be struggling with credit card debt; with the current credit card interest rate at an average of about 16 percent, it could take years for cardholders with outstanding debt to pay it off. But with a cash-out refinance, you can take a slight increase in your mortgage and do away with those interest costs entirely.
Let’s say you
have a credit card that’s gained a significant amount of debt. Even if you
reliably meet your minimum payment requirement, that debt will continue to rise
based on your interest rate and will result in you taking longer to pay off the
loan. Let’s also say, however, that you did a cash-out refinance that put that
$30,000 from our earlier example right into your pocket; you may be getting a bigger
mortgage by refinancing, but you can use the cash sum to pay off your credit
card debt and prevent years of interest costs – that’s a lot of savings in the
long term.
Of course, this
only works if you’re a disciplined spender and know not to fall back into
credit card debt after paying it off. Speak with a financial advisor
to evaluate your situation and determine whether this would be the right use of
cash-out refinance funds for you.
Purchase collectibles,
antiques or memorabilia
Everyone has
their thing – and for some, it’s buying physical objects at auction for a
significant price. Despite our continuous transition into a digital-focused
culture, many find value in owning props, memorabilia, collectibles, antiques
and more. If you have the cash-out refinance funds to spare, it may not be a
bad idea to put some toward things that may have a higher value in the future.
Here’s an
example: a 2003-2004 LeBron James basketball card sold for
$1.8 million in July 2020. That’s a significant value increase over a span
of about 17 years – and that’s just for a modern trading card!
Here’s another,
more extreme example: just this month (August 2021), a Honus Wagner baseball
card issued sometime between 1909 and 1911 sold
at auction for $6.6 million, making it the most valuable sports card to
date. We can’t all wait 100 years to sell our collectibles, of course, but it’s
important to recognize that these physical things can gain immense value over
time.
So if you’re
looking to put your cash-out refinance funds toward collectibles, always aim to
make a return on your investment and know that it might not happen for a long
time. Make sure you have faith in the collectibles you invest in and most
importantly, do research! Objects related to events that are prominent right
now will likely grow in value over time as demand increases and availability
decreases. And as long as you verify the legitimacy of your collectibles, you’ll
be setting yourself up for a future return on your investment – especially if
you find the right buyer.
Do nothing,
but make money anyway with high-yield savings
If you’re not
sure how to use your cash-out refinance funds, you can deposit them into a
high-yield savings account that will accrue interest over time. Unlike
traditional savings accounts, these include significantly higher rates that
apply not only to your principal balance, but to the interest your account
earns as well. And depending on how often your interest compounds, you’ll earn much
more than a standard savings account by simply letting that money sit in the
bank.
For example, a certificate
of deposit (CD) is ideal for anyone interested in earning high-yield savings
with minimal risks. CDs are federally insured and often remain at the same rate
for the duration of their term. To some a fixed rate may seem unattractive, but
consider this: if you have an excess of cash-out refinance funds, why not put a
small portion of it toward a passive source of income? Even just a few years of
having funds in a CD will result in a noticeable return – even more so if you
work with the right lender and get a good rate.
It’s important to
note that not all high-yield savings accounts offer fixed rates. Depending on
your lender, some may involve more risk with a variable rate that could
fluctuate and change. As with all financial decisions, it would be beneficial
to meet with an advisor to determine if this would be the right investment
opportunity for you.
Wrapping up
At the end of
the day, cash-out refinance funds can be used for almost anything – but if
you’re going to use them, be sure to put them toward something that will
improve your financials, serve as a money-making investment, or both. A few
viable options include:
- Investing in secondary/multiple properties
- Purchasing collectibles to sell for more at a
later date - Consolidating debt to save on interest
- Taking advantage of high-yield savings accounts,
and - Renovating your home to increase its future
value
As long as
you’re in a good position to refinance, cashing out on part of your home’s
equity can be a great move to build long-term wealth. If cash-out refinancing
sounds right for you, contact a
Total Mortgage loan officer and get started today.
Source: totalmortgage.com