Here’s the beautiful thing, Rob. Let’s say you have a financial need to get your hands on some cash. Maybe you have a large retirement account. But guess what? If you tap into that, you’re gonna to pay income tax. You’re gonna pay penalties.
Maybe you have your money tied up in the market, and you hate to liquidate some of those stocks, because the market’s been performing well. Or, maybe the market’s underperforming on your stocks and you need to stay in them until they can come back. Maybe your money is tied up in CDs that you would have costs in liquidating.
If you’ve got equity in your home, it may make sense to take out and do what’s called a cash out refinance. Now, this is where you have a low or maybe no loan balance, and you have a significant amount of equity in your home. You can borrow up to 80% of the appraised value.
If your home is worth $300,000, you could get a loan for up to $240,000. So if you currently owe $200,000, you’d pocket the $40,000 difference. If you currently owe zero, you’d pocket all $240,000.
Why a Cash Out Refinance Benefits You
But here’s some of the cool keys of why getting your cash from a cash-out refinance on your mortgage may be a good strategy.
Number one, the money you receive is tax free. This is not taxable income. This is borrowing. So that $240,000 is nontaxable.
If you took it out of an IRA or a retirement account, you would not only pay tax on it, you would also pay penalties for early withdrawal. If you took that out of CDs or stocks, you may pay penalties for liquidating early. Life insurance may have penalties to liquidate early. So taking the money from a cash out refinance is not taxable.
Tax Deductible Interest
The other nice thing is the new mortgage payment, the interest you’re making, that interest is tax deductible for most people. So again, as long as you’re writing off enough to have your itemized deductions on your federal tax return, you can write off the mortgage interest on this cash out refinance of your primary residence.
It’s a great way to get your hands on cash, lock in a super low-interest rate. We’re at a time now where rates are at historic lows, so a lot of people that we see taking cash out. They’re doing it because they believe rates will be higher in the future. So if you can borrow $240,000 at 3.25% today, how much would you be able to invest it at four or five years from now?
And then, when you combine that with the potential for our specials we run, where we have no closing costs on a refinance. Now you can get your hands on this money with absolutely no cost, no penalties, no nothing. So at RP Funding, we never charge lender fees. Then from time to time, we’ll offer specials where we’ll pay all the closing costs on a refinance.
If you’re lucky enough to be around and looking and take advantage of one of those, you can get your hands on this cash out with absolutely no upfront cost, making it the cheapest and easiest way to get your hands on a large sum of money for a future investment.
The Financial Benefits of a Cash Out Refinance
One of the things that you and I talked about back when we started resuming our conversations on refis was during the bad years, a lot of people built up those credit card limits all the way to the top. So they’re sitting on maybe $25,000, $50,000 in debt on their credit cards, paying 18%, 19%, 20%, plus penalties, plus the holding charges, when they could get this money and pay those off and not have that negative going against them every month.
And two, once you do that, the credit card companies will come back and start making you better offers, because they lost you. That’s the amazing thing. When you have all that debt, they start raising your rates and giving you penalty rates and really messing with you. If you do a cash out refinance on your home and pay off all that credit card debt, all of the sudden the credit card companies will start throwing low interest rates at you again and low APRs at you again, which can help your overall financial situation.
Your credit score will also increase. So carrying a large balance on a credit card hurts your credit score. Carrying a large balance on a mortgage does not.
So, there are two keys there. A cash out refinance can, in some cases, help improve your credit score if you use that money to pay down other revolving debts.
What else could we use the money for? We could take care of student loans. We can take care of maybe college tuition instead of having to have student loans. We can take care of repairs on the home. Maybe you want to add a pool, do an addition. Maybe the roof needs repairs. Maybe you need new kitchen cabinets and new flooring.
All these things can be taken care of through a cash out refinance– paying off other debts, paying off car loans, purchasing new cars, purchasing additional real estate.
We’ll see people take cash out of their home because they want to buy a vacation home somewhere or they want to buy a piece of land somewhere. Instead of financing the new home, it’s easier to pull the cash out of their current home. Then, they get to buy the new home as a cash buyer, because they’ve already got their money and they’re ready to go.
These are all important strategies to keep in mind. Also, some people are taking it out for future investment use. With rates as low as they are, there are people who think they can earn a better return in the market by investing that money in what they’re paying in interest now. And while today, bonds and investments may not be paying very much, that will not be the case forever.
If you have a 30 year fixed rate loan at a low rate, if five or six years from now you have that cash and rates are higher, it’s pretty easy to turn that into a nice profit. These are all reasons that people look at doing a cash out refinance in order to convert the equity in their home into cold hard cash. You can do it with us here at RP Funding. And there’s never any lender fees. From time to time, we even run specials, where there’s no closing costs at all.
A lot of people over 62 that aren’t considering this as a way to access more money. Should they consider a Cash Out Refinance?
Absolutely. Even if you weren’t comfortable with the payment, or maybe you’re on a fixed income, you could take the cash out and use a piece of that to make the payment every month. Then you’ll have your free cash, and you can use the difference to make the payment.
There’s a lot of strategies you could do, a lot of creative things that can be done by accessing the equity in your home. But, what makes it all possible is how ridiculously low-interest rates are right now. If rates weren’t this low, if money wasn’t so cheap right now, we wouldn’t even be talking about this. The fact that mortgage rates are just so ridiculously low means you as a consumer can take advantage by locking those low rates in for the next 30 years and getting your hands on some much-needed cash today.
Want To Learn More?
If you want to find out more about a cash out refinance, getting pre-qualified for your home loan or additional mortgage information visit RPFunding.com or call 1-866-765-0765.