Tuesday, April 26

A Cash-Out Refinance Doesn't Mean You're Poor

Like many Floridians, we are considering a new roof. Insurance companies want us all to replace our 30-year roofs every decade. If you need a new roof but don't want to scrimp and save for a year (hoping your current roof holds out), then you might consider a cash-out refinance, a home equity loan, or a HELOC. Just so you know, there's no shame in any of these options. However, it's also better to use cash if possible.

If you want a new TV or car when the current model works fine, I'd say you should probably save up and wait, even if your non-Jacksonville-based team might be in the Super Bowl. Your house, however, is your most important current investment, and it's just a little more important than other wants you might have. It's also where you live, unlike your stocks or your exercise machines. While Tesla could go belly-up and leave you with a dwindled nest-egg, your actual nest can't be lost to the ravages of Florida weather.

I'd rather pay cash, even for home purchases. And I have enough cash for the next smaller issue, which will be the hot water heater. I might even have the cash on hand for either windows or a roof right now, but using it when there's $100,000+ of new equity in my house (from rising home values) seems risky. Then again, refinancing with cash coming out just before a real estate bubble bursts is also risky. Let's say we refinance at 1% lower APR, pay $3,000 to get the loan, take $20,000 out in cash, get the new windows and roof, and then the home value tanks. Worse, most people will take out more than they need for the maintenance in order to pay off credit cards or buy luxury items. Now you've got home upgrades (why stop with the roof?) and a new BMW paid for with the loan, based on a higher home value.

When I first wrote this article, home values were going through the roof and interest rates were still lower than when we bought, but now that interest rates have doubled from the low, refinancing looks much worse. Actually, any kind of financing looks bad when interest rates rise, and the cash you'd get out when rates are high is expensive cash. Luckily, I  ended up saving the cash for a roof, but I know that doesn't always work out for everyone. While I still believe there's no shame in taking out a loan to pay for a roof, probably the worst time is when interest rates are higher than they've been in a generation and home values are inflated, creating a recipe for a lot of people in Florida (who need new roofs to avoid losing insurance) to get underwater on their loans

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