Using Your Refinance Dollars Cents-Ably

Times are changing.

Refinancing nowadays to take advantage of interest rates, eliminate PMI (private mortgage insurance), or simply to build a cash stockpile all are fine reasons to refinance. So, assuming that you have refinanced successfully, what should you do with the money that you are saving each month, or that you have available to you as ready cash?

Betting on Higher Interest Rates

In other debthelp.com articles, we have discussed what not to do with the money. (Probably do not take that fantasy trip in a glider over the African Safari.) We also have talked about the basic advantages involved with the decision to refinance in the first place (exchange high interest rates for lower rates, fix your adjustable rate mortgage, etc.). The savviest refinancers also may have discovered the merit in what could become the biggest, most profitable gamble in American history: betting that interest rates will continue to climb.

This “bet” is the reason why so many people currently are cashing out at even higher rates than their existing mortgages. For example, individuals may go from 6.25 to 6.75% interest rates. This is refinancing? Yes it is, if you plan to get enough cash out to earn back more than 6.75%.

In other words, people increasingly are treating the equity in their homes as profit. Rising interest rates and an abundance of houses may mean that these profits will shrink if homeowners wait too long.

Some people, in anticipation of money becoming more “expensive”, use their refinance money to buy stocks, discounted vacation homes, raw commodities or even speculation on raw land. With rising interest rates, it makes sense for some people to think about home equity as moving onto the financial back burner, but this does not make home ownership an unsafe place of return. In fact, home ownership remains the single greatest, safest investment in the American financial system.

Nor is such a course of investing favorable for those of us on fixed incomes, with limited nerve, or without financial leeway. There is absolutely no reason to throw out your refinance without a good plan. If you cannot afford to lose money gambling, then do not gamble on rising interest rates and the applicable investments.

Starting Your Own Business?

While interest rates have been rising recently, they still are at historic lows. Is starting your own business part of a good investment strategy? As is the case with every refinancing option, you should keep at least 20% equity in your home. If investing in your business means delving deeper into home equity than that 20%, then do not do it.

Most businesses (about 75%) fail in their first year, mainly because of insufficient funds. This is not meant to discourage you, but you must be realistic when risking your home, as well as your emotional well-being.

If you plan to start a new business with your equity, or if you plan to put money from refinance into an existing business, I advise you to treat your home as a grumpy business partner. If the only funding you have for your business is home equity, then in my opinion you do not have enough funding.

To better analyze your financing, develop a written business plan, and have an objective party examine it. The Small Business Administration houses retired executives who will evaluate your financial plan at no cost to you. If you do decide to go for it, make sure you “pay back” that grumpy house from your business profits as soon as possible.

Bottom Lines

Once upon a time, our grandparents would have taught us to pay off our mortgages as soon as possible. Because interest rates have been so low recently, many people with fixed rates of less than 6% now have reason not to prepay their mortgages. If this is the position you are in, you also may want to consider acquiring more property, or investing money into bonds or long-term securities.

As always, watch your bottom line. Talk to a debt counselor who can analyze the risk you can tolerate, and who can help you determine how best to use your refinance money.