If you want to enjoy your retirement at the age of 65, you need to purchase your own home by 35 years old. Aside from low housing costs, retirees can also leverage their homeownership through home equity and cash out refinance.
Russ Thornton of Care for Women Atlanta says, “Those who keep their homes for years and years and years tend to grow equity, which can be a wealth builder.”
When you retire, your ultimate goal is to minimize your expenses and have income without working. One option is to open your house for rent like Airbnb. Another way is to access home equity and consider cash-out equity.
How Does Cash Out Equity Work?
According to Investopedia, “cash-out refinance is a mortgage refinancing option where the new mortgage is for a larger amount than the existing loan to convert home equity into cash.” If you have high home equity and you want to lower your mortgage rate, cash-out refinance can be the best option for you.
According to Freddie Mac’s report, $16 billion worth of equity has been cashed out in the second quarter of 2018. This is the highest since 2008 which proves it is becoming more and more popular among homeowners. So how does it work?
Cash-out Refinance: Get 80% of the Total Equity
In its simplest sense, it is like selling your house but not to others, rather to yourself. For example, your house worth in the market is $200,000 but you still owe the bank $100,000 so its equity is $100,000.
Through the cash-out refinance, you are able to get at least 80% of the total equity. So based on our example, the bank will give you $80,000.
However, the amount you can get still depends on several factors like income and credit rating.
Is Cash-out Refinance for Me?
You have to think through the risks for this option. Cash-out refinance will give you a new mortgage rate. The new rate depends on market status and your credit score. So if you have a poor credit rating and the market condition is not favorable, you would probably get a higher interest rate for the new mortgage.