Using Your Home Equity
Your home represents one of your largest investments. For many, it is their only investment so it is a very satisfying thing to see your home value go up year over year. That is exactly what has been having with the national average for home appreciation being between 3 and 5 percent. And that is just the average, you might be seeing much higher levels in your city.
Cashing in on all of that equity could be a very smart move for you. There are a lot of situations where pulling money out now can greatly improve your financial situation. If any of the following conditions apply, you might want to consider using your equity.
You Need To Pay For College
You can use your home equity in two ways. Maybe you need to finally pay off your college or perhaps you need to pay for college for one or several of your children.
If you have student loan debt, it might finally be time to pay off those loans. Sure, this is considered good debt, if there really is such a thing, but the payments probably do not feel that great.
With average interest rates in the 5 to 6 percent range for student loans, the savings are not huge but they are there. In addition, stretching that debt repayment over a longer period will reduce your monthly out of pocket.
If paying for a child’s college is on your mind, a cash out refinance can do just that. Pay for college without having to take out a single student loan. If your children are young, you could even pull out money now and place it in a long term investment account so that it is ready when they need it.
You Have Credit Card Debt
This one is a no brainer. The average credit card interest rate is over 17 percent and you might be paying much more than that. Depending on your level of debt, it could be costing you hundreds of dollars a month in interest.
Refinancing can allow you to pay off those high interest cards and pay down your debt at a much more reasonable sub 5% interest rate.
In addition, paying off those credit cards could result in a much lower credit utilization ratio on your credit report. That could lead to a substantial increase in your credit score. Something that will save you money for years to come.
You Have Mortgage Insurance
If you purchased a home with less than 20 percent, you are probably paying mortgage insurance. Private mortgage insurance could be as much as 1 percent a year. On the average 300.000 dollar house, that is 3000 dollars or 250 dollars a month.
It used to be that FHA mortgage insurance would automatically drop when you had enough equity. This is no longer the case if you put less than 10 percent down. If you put more than 10 percent down, it will drop off, but only after 11 years. The only solution is to refinance.
Use the equity in your home to refinance without mortgage insurance and you will save hundreds of dollars a month.
You Don’t Have Savings
Everyone should have an emergency fund that is stocked with enough money to cover a 3 month to 6 month period of expenses. Sure, you have a lot of money in equity but it is not convenient to get at in an emergency.
If you refinance your home, you can take that money and establish a substantial emergency savings fund. Invest the money and offset the modest interest that you would be paying for the money on your new mortgage.
You Have Unpaid Medical Bills
A stretch of bad health can leave you with a mound of medical bills, even with insurance.
Unpaid medical bills can wreck your credit and put an enormous strain on your financial life. Equity is a great way to get rid of this debt. Get caught up and protect your credit rating at the same time.
You Need To Make Repairs or Renovations
This is one of the biggest reasons that people do cash out refinances or establish Home Equity Lines Of Credit.
Use the money to pay for expensive home repairs and improvements. Be choosy with the renovations that you make and you could see as much as a 90 percent return in home value.
If you will be selling your home in the next several years, this is particularly important as some renovations may only give you a 50 percent return or less. That would be throwing money away.
When Not To Use Your Equity
There are mainly two reasons you would want to use your home equity. One is to improve your financial situation whether by getting rid of debt or adding to your security. Another is to do work on the actual home itself, a situation that would result in an increase in home value.
The last thing that you would want to do is use home equity for a non necessity purchase. A 10000 dollar trip to Hawaii would be nice but after the luau is over, you will have put yourself in a worse financial position.