If you’re looking for ways to increase your investment portfolio or earn some passive income, take a look at your home equity. Home equity is often underutilized. It grows as monthly mortgage payments are made or as the market value of your home increases. If you are allowing your equity to sit by idly, you may be making a mistake. Fortunately, it’s quite easy to obtain a cash-out refinance and utilize the proceeds in a way that earns additional income to put towards a new investment or eliminating other debts.
What Is a Cash-Out Refinance?
A cash-out refinance replaces your existing home loan, possibly at a lower interest rate. Your new loan will have a higher balance than you currently owe on the home, and the difference between the balance owed on the old mortgage and the new, higher balance is the amount you are able to “cash out.”
How Does a Cash-Out Refinance Work?
Typically, the maximum amount that you can obtain from your cash-out refinance is 80% of the home’s current market value. 20% equity is usually required to be left in the refinanced loan. There are loans that will go higher such as FHA and VA loans.
For example, if you have a current mortgage balance of $200,000 and your home’s value is $320,000, then you can obtain a new mortgage for $256,000 (80% of $320,000). The difference of $56,000 is the amount you will receive in cash, less closing costs.
Cash-out refinance rates vary, but are currently between 3 and 5% depending on factors such as the borrowers credit, the LTV, the type of the loan, and whether the borrower lives in the property or it is an investment property.
Ways to Maximize the Value
There are several ways to make the most out of your home’s equity. These include:
1. Cash-Out Refinance to buy an Investment Property
One great way to expand your financial portfolio is to buy an investment property. Purchasing a second property can allow you to quickly expand your wealth.
In many cases, homeowners will purchase another property and rent it out, then obtain another loan to purchase a third property. This gives the owner a strong portfolio of real estate assets that they are able to rent out, giving them the income needed to repay their loans.
Real estate has a strong tendency to increase in value over time, which improves the overall value of a financial portfolio.
2. Pay Off Credit Card Debt
Paying off credit card debt with high interest rates increases monthly cash flow, allowing the borrower to enjoy greater financial flexibility and eliminate wasteful interest payments.
3. Complete Home Improvement Projects
Utilizing cash-out refinancing money towards home improvement projects can improve the long-term market value of your home. These projects can include landscaping, remodeling of the interior, or upgrading the roof, which are all great ways to protect the value of a home.
4. Add to Existing Investments
You can utilize a cash-out refinance to invest in items that also reduce your taxes, such as College 529 Savings Plans or IRAs.
5. Purchase a Second Home
If you’re interested in owning a second home to use as a vacation home or to support a family member, a cash-out refinance is a great way to obtain the down payment needed to purchase one.
6. Protect Against Cash Flow Emergencies
Having a nest egg available can help in the event of a crisis in which immediate funds are needed.
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