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.
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.
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