Refinancing with a cash out is becoming more and more tempting due to record-high home equity and falling mortgage rates. I have definitely given it some thought. But after giving it some thought, I’ve come to the conclusion that it’s probably not the wisest course of acting
I have witnessed far too many regrettable situations in which a person obtained a Home Equity Line of Credit (HELOC) or refinanced with a cash-out, only to endanger their entire financial situation. The temptation to spend money on frivolous items was just too great to ignore.
It’s better if you have less debt. Ideally, you want to be debt-free at the end of your working career so that you can relax financially in retirement.
A cash-out refinance raises your debt burden and puts you at greater risk of not meeting your financial objectives. As we age, time becomes our most valuable asset, and making financial mistakes simply makes us lose more of it.
My Ultimate Goal: Invest in Real Estate and Proceed with a Cash-Out Refinance
I came up with a two-pronged plan in 2023 to upgrade my lifestyle and finances. Since demand had been stifled by high mortgage rates, the first step was to purchase a home with cash. I wanted to get a better bargain and avoid paying a hefty mortgage during that time, so I paid cash for my purchases. The next course of action involved waiting patiently for mortgage rates to drop before re-liquifying my assets through a cash-out refinance.
In October 2023, I bought my dream home at a bargain after completing stage one successfully. Home values have increased by 10% to 15% since then, as evidenced by the spring bidding wars of 2024. In the meantime, mortgage rates have decreased dramatically—they are now almost 2% below high.
I have to decide now: do I cash out to take advantage of these lower rates? I have a suspicion that several of you were pondering the same thing and had the same master plan.
Long-term homeowners, you have accumulated a significant amount of home equity. Why not use some of it to improve your life right now? You desire more, regardless of how much you’re presently enjoying your appreciated home!
The Reasons You Should Probably Avoid Cash-Out Refinancing
Bidding wars will be much more fierce in the first half of 2025 than they were in 2024, with 80% of me believing this. The median home price will reach new all-time highs as a result of these bidding wars. The following variables indicate that the current climate is perfect for rising real estate prices:
Repressed desire inadequate number of dwellings Mortgage rates are declining. A moderate recession or a gentle landing record-high wealth in the stock market Long-term Fed rate-cut cycle lucidity regarding the upcoming presidential administration and prospective housing subsidies Possible capital flight from public equities into real estate
There’s always a danger that real estate values won’t rise, even if you’re really convinced they will. You never know when you might have a health problem, lose your job, or experience a natural calamity that destroys your house.
Given that there is a one in five possibility of losing money, are you willing to take on more debt? The answer is no if you are over forty and have a family to support. A cash-out refinance is not advised.
Remember that you’re already doing a great job of supporting your family, and resist the urge to take out a loan against your home equity. Don’t endanger that development. Whether or whether you have children, you have worked hard to accumulate significant equity for your retirement. Don’t jeopardize it now.
Having All That Home Equity Already Has You Winning
When aiming for financial independence, your objective should be to pay off debt as soon as you are able or desire to stop working. Having purchased or paid off your principal residence with cash is one of the most important steps toward financial freedom.
You’ve crossed the tipping threshold if your home’s equity is greater than 50%. As more of your mortgage payment goes toward principal, let the debt snowball to accelerate rather than reversing it. Once you’ve started paying off debt, don’t stop. Your financial progress is halted if you refinance with a cash-out. Refinancing is expensive, and you’ll have to keep paying interest to cover the extra loan.
There aren’t many expenses you can’t pay with cash flow whether you’ve paid cash for your house or have a suitable mortgage amount remaining. Consider this: what more could you possibly require than clothing, food, shelter, and medical attention? For any of these necessities, you shouldn’t need to execute a cash-out refinance if you have health insurance.
Control your desires. However, what if you refinance with a cash out to pay for bigger expenses like emergencies, college tuition, or additional real estate? Now let’s talk.
A Refinance with Cash Out for Emergencies
Cash flow and your emergency fund, which should include at least six months’ worth of living expenditures in a liquid account, should take care of emergencies.
Refinancing with cash out typically takes 1-2 months to complete. You won’t get the money from a refinance in time if you’re in a real emergency. Rather, because there is a fee associated with a cash-out refinance, it will initially cost you more money. If you don’t have much in your emergency fund, start saving more today.
A College Cash-Out Refinance
You’ve had 18 years to save for college, perhaps more if you planned well. There’s no good reason to put your home at risk to pay for college. Tuition should be covered by diligent saving, preferably in a tax-advantaged 529 plan.
Even if you required $100,000 for college, a cash-out refinance would not be worth the expense and time. It is preferable to use student loans, cash flow, or your child’s employment to make up any deficiency. Don’t jeopardize your house to cover unnecessary costs. Divide up your money and make every effort to keep your house safe. You run a higher risk of running into financial difficulties once you decide to mix up your finances.
Using a Cash-Out Refinance to Purchase More Real Estate
It was typical practice to use home equity to purchase additional real estate while loan rates were low. Despite a downward trend since 2023, rates remain higher than those of 2020–2021. Increasing your debt load to buy another debt-ridden property raises your risk. During the height of real estate craze, there is often a greater temptation to perform cash-out refinances. Your net worth could be completely destroyed if you have too much debt and are caught in a downturn.
It’s preferable to manage your financial flow and save systematically for a down payment. You can save up more than 20% of the down payment for a new home over the course of five to ten years. Through your primary house, you continue to reap the benefits of real estate appreciation in the meantime.
The majority of homeowners who lost everything during the global financial crisis owed too much money. Their credit was destroyed as a result, which kept them out of the next more than ten-year real estate boom. That strikes twice!
How About Buying Stocks With A Cash-Out Refinance?
Using the money from a cash-out refinance to purchase stocks may carry even greater risk than investing the money in real estate. Compared to real estate, stocks have traditionally yielded larger long-term returns, but they are far more volatile. The possibility of more earnings is the main driver of cashing out to purchase equities, but that’s just greed speaking. Unlike real estate, stocks have no use. I advise against using a cash-out refinance to purchase the S&P 500 or any other stocks because of this. Don’t mix up your finances and control your greed.
Real estate is a winning strategy already. Don’t mix that achievement with your stock holdings.
Cash-Out Refinancing to Cover Retirement Expenses
Using home equity to fund retirement is a bad idea. That is the purpose of pensions, taxable investments, tax-advantaged retirement funds, and Social Security. It’s time to rely on your investments for their intended purpose after a lifetime of earning and investing. In retirement, it’s simple to spend home equity on wants rather than necessities.
For instance, fifteen years ago, a 77-year-old woman I know borrowed $200,000 out of her $400,000 property to pay for living expenses. Unfortunately, she spent recklessly on creatures that she couldn’t readily care for, which caused these bills to skyrocket. She is still in debt for her house, almost $200,000, fifteen years later. She should have paid it off when she was sixty-two.
Even worse, she has over $100,000 in revolving credit card debt, which she accrued with the help of her home equity. Being wealthy might occasionally serve as an incentive to spend even more money. For this reason, it can be advantageous to have a broke mindset. Her children are currently attempting to pay off and close her credit card accounts one by one because of the tremendous hardship her financial condition has placed on them. Managing your money might get harder as you get older, especially if cognitive decline starts to occur.
Meanwhile, debt is unrelenting in its compounding of interest. Your lifelong accumulation of wealth can be destroyed by debt if you don’t have a reliable source of income in retirement or extreme self-control.
