A Cash Out Refinance and selling one’s home both reap rewards, but is one option better than the other?
The Basics: What is Equity?
Before we discuss the difference between the two sets of benefits each product provides, we need to understand what equity is. Equity is the portion of the home you actually own. With each mortgage payment, a portion goes to the principal. The more principal is paid down, the more house you own. What’s also tricky about equity is the home’s value also plays a large role. If your home’s value goes up, you have more equity. The same goes for the reverse. If your home’s value goes down, you also lose equity.
Let’s think of it in simpler terms. Let’s pretend you own a rare collectible and you only paid $100 for it, but now it’s worth $500. When you first purchased it, you had equity of $100. Because the value of the item went up to $500, your equity has now increased to $500. If you sold the item, you will be getting $500 for it instead of the $100 you originally paid. Again, the same goes for the reverse. If there is no demand for this rare collectible, it is worthless. If the value for it sinks to $5, you have lost all of your equity and then some. You made a bad investment. When this happens with real estate, this means the homeowner is underwater on their mortgage.
Selling Your Home
Many people buy their first home thinking of it as an investment, hoping to sell it for more than what they paid for it. As time goes on, housing prices go up and so does the value of your home. Picking the time to sell is important, since it can dictate how much profit you can get for the sale of your home. If you sell it too early, you lose out on what you could’ve gotten. If you get greedy and wait too long to sell, you could lose out on a lot more.
But what do you do if you don’t have an investment property to sell and want to take advantage of today’s high home values? A cash out refinance is a great way to take advantage of your home’s equity while still living in your home.
Cash Out Refinance
When people talk about their homes being an investment, they’re usually referring to turning a profit after selling it, or renting it out. For people who only have a primary living space, a cash out refinance can help homeowners take advantage of the peak housing prices without having to sacrifice their home. Since not everyone can afford to own multiple properties, this is beneficial.
If someone decided to sell their home, they would definitely be getting a lot more money back from the sale than when they first purchased the home, but what next? If they were thinking to purchase a home with that money, they would have to pay today’s prices for that home. With all of that profit going towards a different home that’s much more expensive, could you really call that a profit?
There are many reasons homeowners have taken money out of their home. With a cash out refinance, homeowners pay for a home remodel to increase the value of their own home, while also improving their current living conditions. They could even use the money to use as a down payment for an investment property so when housing prices hit their peak again, they can fully take advantage. Homeowners have used the funds from their cash out refinance to pay for their child’s education or to start a business. Whatever the case may be, a cash out refinance is there for homeowners who have equity in their homes to use for whatever they need.