The 1-2-3s of Getting Cash From Your Home

Many of the people who have gotten caught short in the last few years when it comes to home ownership are those who have bought a new house in the last 3 to 5 years. If you’re a homeowner who has stayed put and steadily built equity in your home over the last 10 years, you may be in a situation where you have a significant amount of cash built up in home equity.

You may be able to put that equity to better use as you evaluate your current overall financial picture. Opting to refinance your current mortgage, by financing an amount larger than your current outstanding principal, allows you to free up cash, which you are able to use for other purposes.

How can I get cash from my home?

Consider the situation where you owe $75,000 in outstanding principal on your current mortgage, while your house is currently appraised at $250,000. You have $175,000 in home equity in your home. Perhaps you opt to take out a loan for $125,000. With the $125,000, you pay off the outstanding $75,000 loan, and still have $50,000 to spend as you see fit. Your new mortgage obligation is for $125,000 plus any loan fees, which still leaves over $100,000 equity in your home. This can be a great solution when current cash flow is being squeezed.

How can I use this extra money?

There aren’t restrictions on how you can use the money. It’s yours to use for whatever you want. Typical reasons people opt to “cash-out” a portion of their home equity is to pay for college, pay for a major remodeling project, pay down high interest credit card obligations, buy a new car, finance unexpected large expenses, or to pay other monthly bills when squeezed by challenging financial times.

Being smart when tapping the equity in your home

Used responsibly, getting cash from your home can be a smart and reasonable thing to do. It can provide low cost funding for necessary expenses, and can help you better manage your overall financial obligations and monthly payments. Additionally, interest paid for home mortgages, second mortgages and home equity loans are tax deductible, which can decrease the overall cost of borrowing. This is not a good solution if the cash is used recklessly, and makes your current financial situation more difficult with increased monthly payments without adequate income to cover expenses.