Reason #3 to Refinance: Pull Out Equity
Do you want to do home renovations or buy a rental property? That’s a lot of money to come up with on your own. Luckily, there’s an easier way: by refinancing your mortgage.
The first reason you might want to pull out equity is to do home renovations. Coming up with a spare $50k to renovate the kitchen or bathroom can be tough. It could take you months or years to save up enough money. Sure, you could take out an unsecured line of credit, but that can get expensive quickly. You may be looking at an interest rate between 6% and 8% on an unsecured line of credit.
For example, if you borrow $50,000 at 8% from an unsecured line of credit, you’re looking at interest-only payments of $333 per month. Can you really afford that? Keep in mind you’ll need to pay more than that every month actually to pay down the principal.
Imagine if you took out a new mortgage or Home Equity Line of Credit (HELOC) instead? With a new mortgage, your rate would be substantially lower. You’re looking at a rate in the low 2%’s. If you took out a HELOC, you’re looking at a rate of 2.95% (Prime Rate, plus 0.5%) at most lenders.
Using the same example above, $50,000 outstanding on a HELOC at 2.95%, you’re looking at interest-only payments of just $123. That’s a cash flow savings of over $200 a month! With this extra cash flow, you can use it to pay down your home renovation debt sooner.
You could even use the money you borrow to add a basement apartment and generate a new income source.
To Buy a Rental Property
A second reason you may want to pull out equity is to buy a rental property. When buying a primary residence, you can make a down payment for as little as 5%. That’s not the case with a rental property. With a rental property, you have to make a down payment of at least 20%. If you’re buying a $500k property, that means coming up with a down payment of at least $100k. That can be tough and could take you years to save. Luckily you don’t need to do that.
By taking out a HELOC, you could access the money you need to make a down payment on a rental property right away. By doing that, you could buy at today’s home prices instead of being forced to wait years to save and buying when home prices are likely a lot higher in the coming years.
A third reason to pull out equity is to invest. With interest rates as low as they are right now, you might decide to refinance your home and invest in the stock market. When you do this, it’s called leverage, and there is an additional risk. However, if you feel the risk is worth it and you’re investing in something likely to provide you with a stable rate of return, then it can be worth it.
The Bottom Line
Are you considering any of these options? Speak to our mortgage experts to help figure out whether taking out a new mortgage or HELOC makes sense for you.