Why Refinancing Could Free Up Cash for Strategic Investments

written by

Jim Mucci

posted on

November 28, 2024

Getting money from your home can help you grow your wealth. When you get a new loan on your home, you can take out some of the value you've built up. This gives you cash at better rates than credit cards.

You can put this money to work in smart ways. You might buy stocks, which can grow your money by about 10% each year. Or you could buy homes to rent out, which can make 8-12% each year. Starting a business could make even more money.

To make this work well, look for a new home loan with low rates. The rate should be much less than what you think you can make from your new plans. It's also good to spread your money into different types of growth plans.

Understanding Home Equity

Think of home equity as your piggy bank inside your house. Every time you make a house payment, your piggy bank gets bigger. When your house becomes worth more money, your piggy bank grows too.

Home equity is simple. It's what your house is worth now minus what you still owe on it. As you pay your house bills each month, you own more of your home. When you own enough of your home, you can use this money for things you need. You might fix up your house or pay off other bills.

Your home equity changes all the time. Sometimes your house is worth more. Sometimes you owe less on it.

Keep track of how much of your home you own. This way, you can use the money when you need it most.

Types of Refinancing Options

Looking to get a new home loan? You have two main choices.

You can change your monthly payment and loan length with a basic refinance. Or you can get cash from your home's value with a cash-out refinance.

The government has loans that are easier to get, like FHA and VA loans. Banks also offer their own loans.

If you have good credit, bank loans might give you better rates. But government loans can help if your credit isn't perfect.

Rate-and-Term vs. Cash-Out

When you want to change your home loan, you have two main choices. Let's make them simple to understand.

The first choice is called rate-and-term. Think of it like trading in your old loan for a new one with better rules. You keep the same amount you owe, but you might pay less each month or finish paying sooner.

The second choice is cash-out. This lets you get money from your home's value. You get a bigger loan than what you owe now, and you get the extra money in cash. You can use this money to fix your house, pay bills, or save for something big.

Get mortgage-smart in just 6 minutes

Get Mortgage Funding delivers easy-to-understand updates on home buying and financing options right to your inbox, so you can make informed decisions with confidence.

But remember – you'll owe more money, and you might've to pay more in the long run.

Both choices can help you, but pick the one that fits what you need. If you want lower monthly payments, go with rate-and-term. If you need cash now and don't mind owing more, pick cash-out.

Government-Backed or Private Options

When you want a new home loan, you can pick from two main choices. You can get help from the government or go to a bank.

The government has three kinds of loans that can help you. These are called FHA, VA, and USDA loans. They often have good rates that save you money. If you already have one of these loans, getting a new one is easier.

VA loans are great for veterans because you don't have to pay extra fees. With FHA loans, you do have to pay some fees each month.

Bank loans work a bit different. You can get them from your local bank or credit union. You need good credit scores to get these loans. They move faster than government loans.

But you might pay more in the long run. Banks also have more rules about how much money you make.

Current Market Interest Rates

Interest rates shape if you should get a new home loan. Think of rates like prices at a store – you want the best deal! A small change in rates can mean big savings on your monthly payment.

To know if it's a good time to get a new loan, look at:

What the Fed says rates will be soon
What loans cost in your town right now
How much banks charge for different types of loans
The gap between your old rate and new rates

Don't rush into a new loan. Take time to check if the savings are worth the cost of getting a new loan.

Think about what you want to do with your money in the years ahead.

Cash-Out Refinancing Benefits

Getting cash from your home can help you in many ways. You can get a big sum of money by using the value of your home. You only need to make one payment each month. The rates are often lower than what you'd pay on credit cards.

You can use this money to pay off other bills, fix up your house, or start something new that makes you money. If your home is worth more now than when you bought it, you can tap into that extra value without having to sell it. You might even pay less tax because you can take off the interest you pay on your taxes.

While you'll owe more money, your payments stay the same each month. You won't have to worry about payments going up or down. This makes it easy to plan your bills and put your home's value to good use.

Investment Opportunities After Refinancing

After getting a new home loan, you can use the money to grow your wealth. Think of it like planting seeds that can grow into bigger things later.

You can put your money to work in these ways:

Buy shares in big companies that give you money back each year.
Put money in groups that own lots of buildings and share the profits.
Buy a house or apartment to rent out to others.
Start your own business or make your small business bigger.

Pick ways to use your money that feel safe to you. Look for things that can grow over time and won't keep you up at night with worry.

Remember: Only use the money in ways that match how much risk you can take. Some ways of growing money are safer than others.

Risks and Reward Analysis

Think of refinancing as trading in your old loan for a new one.

Before you use this new money to invest, you need to do some careful thinking. Ask yourself if you can make more money from your investments than what you'll pay in loan costs. It's like diving into a pool – you want to be sure the water is deep enough!

The stock market goes up and down, so putting in a big chunk of money at once can be risky. Your loan payments will stay the same each month, but the money you make from investments can change a lot.

Always keep some extra cash saved up to make your loan payments, just in case your investments don't do as well as you hoped.

Interest Rates Vs Returns

Taking money from your home to invest is a big choice. You need to make sure you can earn more money from investing than you pay in interest on your new loan.

Let's look at ways to grow your money:

The stock market usually grows about 10% each year
Rental homes can make 8-12% each year
Growing a business can make 15-25% each year
Safe investments like bonds can make 6-8% each year

To make this work, you want to earn at least 2-3% more than what you pay on your new loan. When you find good chances to invest and the loan costs are low, using your home's value can help you build wealth.

Think of it like this: If you pay 5% on your loan but can make 8% from your investment, you come out ahead.

Just be sure to count all the costs of getting the new loan too.

Market Timing Pitfalls

When you try to pick the perfect time to use your house money for investing, you can get into trouble.

It's like trying to guess two things at once – home prices and how your investments will do. Even if things look good right now, they can change fast.

No one can see what markets will do next week or next month. If you guess wrong, you might end up with a bigger loan when times get tough.

Don't try to be too clever about when to get a new home loan.

Think about what you want your money to do in the years ahead.

Wait until you own enough of your home before taking out more money against it.

The best way to win with money is to stick to a simple plan and not make big moves based on guessing what markets will do.

Tax Implications

Getting money from your home can change your taxes. Let's make it simple to understand.

When you take cash from your home loan, you need to know what it means for your taxes.

You can save on taxes if you:

Use the money to make your house better
Keep good records of how you spend the money
Pay back your loan as planned

The money you pay in interest might help lower your taxes if you use it to fix up your home.

But if you use the money for other things, like paying off credit cards, you can't get tax help.

If you use the money for work or business, you might save on taxes too.

Just make sure to keep your home and work costs separate.

Always write down how you use the money.

This will help when you do your taxes each year.

Real Estate Investment Potential

Having a home gives you a chance to grow your money through real estate. You can use the value of your home to get cash from the bank. This cash can help you buy another house to rent out.

When you own more than one house, you can make extra money each month. Look for homes in good areas where house prices are going up. You might want to buy a house with two or three units to rent out, or just a single house in a nice area.

Banks want you to pay at least 20% of the price when you buy a house to rent. Make sure the rent money you get will cover your bank payments and leave you with extra cash each month.

Stock Market Investment Strategy

Putting money in stocks can be smart if you do it the right way. Instead of trying to pick the perfect time to buy, it's better to put in a little money each month. This is called DCA, and it helps you worry less about the ups and downs of the market.

Think about how much risk you can handle – if you're young, you can buy more stocks. If you're older, you might want more bonds to play it safe.

One easy way to start is with ETFs. These are like baskets that hold lots of different stocks. This helps protect your money by not putting it all in one place.

Market Timing Vs DCA

Saving and growing your money can be hard. Let's look at two ways to invest: timing the market or saving bit by bit.

When you try to time the market, you try to guess when stocks will go up or down. It's like trying to catch a wave at just the right time.

The other way is to save the same amount of money each month, no matter what. This is called dollar-cost averaging, or DCA for short.

Which way is better? It depends on:

How much risk you can handle
How long you plan to save
How wild the market gets
How much money you have now

Most people find it easier to save a little each month. It helps them stick to a plan and not worry too much about market ups and downs. You don't need to be a money expert to do it.

Timing the market can make more money if you're really good at it. But it's tricky and you need to know a lot about money and markets.

It's like trying to predict the weather – even experts get it wrong sometimes.

Asset Allocation Fundamentals

Money needs to go into different places to keep it safe and help it grow. Think of it like putting eggs in many baskets.

You can put your money in:

Big companies (stocks)
Safe loans (bonds)
The bank (cash)
Buildings and homes (real estate)

Stocks can make you more money but are risky. Bonds are safer but grow more slowly. Cash is very safe but grows very little. Buildings can make good money but take time to sell.

A simple rule to know how much to put in stocks: Take 100 and subtract your age. If you are 40 years old, put 60% in stocks.

Check your money plan every few months. Make sure your money stays split up the way you want it. This helps keep your savings safe and growing.

What to Buy	How Risky	How Much It Grows
Stocks	Very Risky	7-10%
Bonds	Less Risky	3-5%
Cash	Safe	1-2%
Real Estate	Some Risk	5-8%

Diversification Through ETFs

ETFs are a simple way to grow your money safely. Think of them like buying a big basket of different things all at once.

When you buy an ETF, you get many stocks or bonds in one package. You can buy or sell them any time the market is open, just like regular stocks.

ETFs are good for your money because:

They cost less than other types of funds
You can own pieces of many companies at once
You pay less in taxes
You can see what you own at any time

ETFs help you put your money in many places at once. This means if one part of the market goes down, you still have money in other places that might go up.

You can start small with ETFs and add more over time. This helps keep your money safer while letting it grow.

Business Venture Considerations

Starting a business with borrowed money needs careful thought. You need to make sure your business will make enough money to pay back your loans and still have money left over.

Most new businesses take time to make money. Keep enough saved up to pay your loans for at least a year. Look at what other businesses like yours are doing to know if yours will do well.

Your business plan should show you'll make back at least 15-20% more than what you borrowed. This helps make sure you can pay your bills and grow your business too.