Cash-Out Refinance vs. Selling A Home: Options for California Homeowners

In 2022, many California homeowners who are considering selling their homes worry they won’t be able to buy another one. And that’s a valid concern. After all, we’ve heard countless stories about how tight the California real estate market is, in terms of inventory.

Some of these homeowners could benefit from using a cash-out refinance loan, instead of rushing out to buy a new home. If you’re sitting on a lot of equity right now, but you’re concerned about selling your house and being able to find another one, you might consider the cash-out refinancing strategy.

Homeowners in California can use a cash-out refinance loan to pay down existing debt, or to renovate their current homes. It’s an option worth considering, especially if you’re looking for ways to leverage your equity.

Cash-Out Refinance vs. Selling in California

In simple terms, cash-out refinancing is when you replace your existing mortgage loan with a new one for a larger amount. You would then receive the difference in the form of a lump-sum payment.

In other words, a cash-out refinance loan allows you to borrow more than you currently owe and pocket the difference. It enables you to convert some of your home’s equity to cash, hence the term “cash-out refinance.”

Homeowners use this equity-based strategy for a number of reasons. Today, we’ll focus on two of them: (1) paying down high-interest debt, and (2) financing home renovations.

Using the Money to Pay Off Other Debts

One of the ways you can use the cash-out refinance strategy is to pay down some (or all) of your existing debt. When you convert some of your home’s equity into cash, you can use the money for just about anything you want. A lot of homeowners in California choose to pay down their debts, especially high-interest debt such as credit cards.

This strategy could also help you down the road, when you’re ready to enter the real estate market and buy another home. In fact, it could help you in a couple of ways.

For one thing, you could improve your overall debt-to-income (DTI) ratio. This is a comparison between the amount of money you earn each month, and the amount you spend to cover your various debts. If you use a cash-out refinance loan to pay down high-interest debt, you could end up with a more favorable DTI ratio going forward. This in turn could make it easier to qualify for a mortgage loan.

You might also increase your buying power at the same time. The interest rate on a cash-out refinance loan is typically lower than some other forms of debt (especially credit cards). As a result, you could consolidate and pay off those high-interest debts, while saving money over time. This might put you in a better financial position down the road, when you’re ready to enter the real estate market again.

This strategy can be particularly useful for homeowners who owe a large amount in credit card debt. According to the credit reporting agency Equifax:

“Refinancing your mortgage to pay off credit card debt is a big decision and should only be considered if your debt reaches into the tens of thousands of dollars and is growing via interest every day.”

Remodeling or Renovating Your Current Home

If California’s highly competitive real estate market has you double-thinking your home-selling plans, you might be ready to put those plans on hold for a while. In that case, a cash-out refinance loan could allow you to invest money back into your current home.

In fact, this is one of the most common reasons why homeowners in California use cash-out refinancing in the first place. They do it to cover the cost of renovation or remodeling projects.

A house is one of the best investments you can make, especially in a tight real estate market like California. So there’s a strong chance you’ll get a good return on your investment, when it comes to remodeling and renovation projects.

Using the lump sum provided by a cash-out refinance loan, you could cover some or all of your home-improvement expenses. You can enjoy those improvements for as long as you decide to stay in the home. And later on, when you finally decide to sell, you’ll have an easier time attracting a buyer.

Figuring Out What Works Best for You

This article is intended for a general audience and does not cover every possible refinancing scenario. Our goal is to show homeowners how they might use a cash-out refinance loan instead of entering the market to buy a new home. As a result, portions of this article might not apply to your particular situation.

Homeowners in California have several different ways to leverage their home equity. And with the way house values have risen over the past couple of years, many homeowners now have a significant amount of equity. Cash-out refinancing is one way of several ways to convert that equity into usable funds.