Financial Literacy Month
With November being Financial Literacy Month, we want to share some information about how refinancing your home can improve your financial situation.
Essentially, refinancing in this way leverages the equity in your home to pay down your other debts. Current regulations only allow you to draw down to 20% equity, which means that on a home worth $200,000, you cannot draw down below $40,000 in equity. It is important to note that in order to refinance, an entirely new mortgage application must be completed.
How Equity is built
Equity can build up in your home in a few ways:
Every mortgage payment that you make helps to build equity. However, many factors influence how much equity you are building. These include interest rate, amortization period, and payment frequency.
Another way to acquire equity is through an increase in the value of your home. In the majority of markets homes increase in value over time. But sometimes improvements may need to be made to the property in order for an increase in value to occur.
As an example:
Your home may have been worth $200,000 when you bought it and you put $20,000 down. This gives you a 10% equity position.
But your home increased in value to $240,000 because of changes in the market, raising your equity to $60,000. gives you a 25% equity position.
You have also added $12,000 in equity from your mortgage payments, raising your equity to $72,000. This gives you a 30% equity position.
Under current regulations, you can refinance down to a 20% equity position. This means that you could borrow $24,000.
Where Can Equity Help?
The most effective use of funds is to pay down other debt. Interest rates paid on a mortgage are usually considerably lower than those on credit cards or other consumer products. Paying down $24,000 in credit card debt in the scenario above could save an easy $240/m in interest fees alone.
Another sound option is to spend the money on home renovations that can increase the value of your home. So, spending the $24,000 discussed above in your kitchen, bathroom, and flooring could easily increase the value of your home $24,000.
If you would like to learn more about using your home to refinance and run through some scenarios please give us a call.
All the best!
Clinton and team.
More question on financial literacy? Feel free to contact us!