14 Jan 5 Ways to Save Money by Refinancing
There continues to be mixed messages and predictions about the direction of the economy and housing market as we break in a new decade, however if you own a home it’s probably still maintaining or increasing value and building equity. Along with dropping interest rates, this has created great opportunities for homeowners to tap that built-in savings and refinance.
A traditional refinance involves taking out a new loan in order to pay down your mortgage with a lower rate and often, lower monthly payments. A cash-out refinance means in addition to a new mortgage, you’re borrowing cash on the home’s value as well. More than 80% of those refinancing their home in 2018 chose a cash-out program, opting to take out some of the equity for a variety of reasons and uses.
Adding to your home loan doesn’t seem beneficial, but with the right objectives and savvy planning, it can actually save you money – beyond the expected lower interest rate or monthly payment. Let’s look at five ways a cash-out refinance can put money IN your pocket:
1 | One of the most significant ways to save big when taking cash out is by consolidating credit card debt. If unexpected expenses have resulted in higher balances, you know how hard it is to knock those down with minimum payments due. The average credit card rate is about 17% APR, but if you miss a payment, some big-name banks charge up to 29% penalty APRs, which can feel like fighting a losing battle with debt.
With mortgage rates in the 3-5% range, you can counter the double-digit credit card rates and save thousands of dollars in interest by using the cash from your home equity to pay down those balances.
2 | Approximately 70% of the students in our country take out student loans to attend college, with rates ranging from 4.5% to 7.08%. Although substantially lower than credit card rates, they have risen steadily since 2016. Because a degree can often increase earning power, and shouldering student debt for years can hinder achieving success, using a cash from your equity may save money – and stress – in the long run.
3 | When refinancing an original FHA loan that required private mortgage insurance (PMI), you can take the monthly difference and dedicate it to a savings plan. Much like an automatic deposit from your paycheck, you won’t notice the difference while it quietly builds your nest egg.
4 | Speaking of savings, when you take cash out of your home equity and earmark some of it for retirement or future plans in an IRA, you’ll also receive a tax credit depending on the contribution and your age.
5 | Borrowers who are thinking of selling in a few years may choose to take cash-out for home improvements that will increase the value of the property. Not only can you get a better price with that kitchen remodel or new deck, but you may be able to deduct the interest you pay on your refinance for home upgrades. Consult with a tax preparer or lender for specifics.
We at EnTrust Funding (ETF) appreciate that the equity in your home is more than just a number. It can create a financial cushion and ultimately save you money in a variety of ways. Give us a call to discuss the possibilities for a more secure 2020.