If you own a home, you are probably inundated with offers to refinance or to add a home equity line of credit – to lower your rate or to cash out. What does that mean to you? And is that a good idea?
Let’s step back a little – and look at the beginning. At the time you purchased your home, you were asked to choose a type of financing for your new home. There are a variety of options available, and usually the loan type is tailored to your needs. The down payment you made and the price you paid, determined, if you had any initial equity in your home. (Equity is considered the difference between the amount you owe and the price the market would be willing to pay.)
Regardless of how you financed your home at the time of purchase, eventually you will start receiving mailings or phone calls, offering you to refinance or to add a home equity line. Sometimes it will be advertised as a way to reduce your Interest Rate, sometimes as a way to “cash out” your property.
Either way, you will be asked to choose a different loan type/program and often you will be offered cash at the time you close on that refinance, but specially if you add a home equity line of credit (the assumption being, that your home is now worth more than you originally owed, and that the “available cash” should be yours to use). If you have been in the home for an extended period of time, purchased the home at a lower than market price, or if you made a large down payment at the time of purchase, you might have Equity in your home, plus the possible appreciation of your home over time (this might not be true if homes in your market are depreciating). This equity is the money that will be available for you to cash out.
The question is – should you take it?
There are a few scenarios you need to consider.
1. How long will you stay in your current home? Are you going to refinance or add a Home Equity line of credit and then move within a year or two? Or are you planning on staying in that home for several more years? And can you guarantee that?
2. If you are not going to stay in the home for more than a couple of years, will the cost of refinancing and/or adding a line of credit be lower than the cost of changing loan types/programs? (For a breakdown of fees involved, please see your Lender.)
3. If you are looking to “cash out” some of the accumulated equity in your home – have you thought about how much of that equity you’re planning on taking out? What if you take out 100% of Equity and then you have to sell? Will you have the money to pay for the sale of your home? (Even if you choose to sell your home yourself, as an unrepresented Seller, there are still fees and costs involved.)
4. What if the housing market in your area depreciates and your home looses value? What if you would have to sell during a down market? Can you bring enough money to the table to clear your loans?
All those points need to be taken into consideration before deciding to “cash out” the equity in your home. Make sure you’re not just looking at the available cash and/or rate, but to consider the cost and long term effects as well. Regardless of initial Equity or Appreciation accumulated over time, keep in mind, your home is not meant to be your personal ATM Machine.
