The choice to refinance your home is one that should be considered carefully. The most important factor is your “why.” Why do you want to refinance? What benefit do you need or want from the refinance? What is your financial plan 12-18 months afterwards?
Before I get into the “why,” it’s important to clarify what a refinance is. As the equity in your home grows (equity is the difference between what you paid for your house and what it’s worth now), that amount is actually part of your wealth. You can wait and realize that wealth when you sell the property, or you can tap into it now in order to further enhance your wealth.
How can your equity enhance your wealth? By re-structuring your loan to borrow against your increased equity. By borrowing against it now rather than waiting until you sell it, you can do things such as invest in renovations. These upgrades increase the value of the home, so you get more money when you eventually sell it. Or, you can pay off other debts, such as credit cards, cars, judgments, taxes, or bankruptcy settlements. That money is useful now and, because you still own the asset, you can continue to build wealth over the remaining years that you own the property.
Once you know why you are doing the refinance, you can put together a solid plan for what you will do once you either get the money out in cash or lower your payment. If you’re lowering your payment, what will you do with the extra room in your budget? Build your savings? Bankroll your kids’ college expenses? Spend more on travel or self-care?
What you do with the money is not as important as developing a plan and sticking to it. For example, if you’re taking money out to pay off credit cards, make sure you actually pay them off, and avoid using them again. This will keep your financial plan on track. It will allow you to use your refinance as a tool for improving your credit and building your wealth.
As Robert Kiyosaki says, owning a home is an expense. However, if used strategically, it can also be used as a financial resource. Develop a plan and stick to it. If you need any help developing your refinance plan, I have access to several types of programs for borrowers in various credit/financial predicaments. Call me to discuss your situation.
Raven B. Kushner
Mortgage Loan Originator
Real Estate License # 02103376