the interest rate. Even a 1% drop in interest rates can substantially lower mortgage payments and interest charges for the borrower. The second reason to refinance is to cash out equity from the home to use for other purposes (equity is the difference between your debt and the appraised value of your property). Giles explains that homeowners can use money obtained from a refinance to serve as a down payment on additional property, to make value-enhancing improvements, like new bathrooms, garages, or swimming pools, to the current property, or to lessen one’s overall debt burden by eliminating other debts.
“You can pay off your current debt and get additional funds and a line of credit on the house,” says Giles. “Use the money cashed out to make prepayments on your other debts and even on the mortgage itself–that helps decrease debt and increase wealth as you get to make lower payments on the house and secure lower interest rates on things like credit cards.”
Roderick McDaniel, CEO and cofounder of Huntington Browne Real Estate, a mortgage banking and real estate sales entity based in Inglewood, California, says homeowners can make refinancing a long-term strategy by utilizing their home as leverage to make other investments or satisfy other personal goals. “As your equity builds, it is money you can take out and invest in the stock market or put your kids through school,” says McDaniel.
Alburg says people who want to duplicate her refinancing strategy should make sure they keep a clean credit history. They should be especially diligent when paying their mortgage, because that will determine whether they are seen as a good borrower. She intends to use the money she obtains from refinancing for long-term wealth building. “After I secure my next building, I’ll build up the equity in it and look to refinance again,” she says
Another way real estate owners can increase wealth is to “trade up” to larger, more expensive properties. This strategy, also called “upgrading,” typically involves using a substantially large equity position in the existing home as leverage to purchase or “make an exchange for” the new property.
Richard Flateau, president of the Bedford-Stuyvesant Real Estate Board in Brooklyn, New York, says the simplest approach to trading up is to first build up substantial equity in the home, and then use the equity as a down payment on the more expensive property. “You have to have enough equity to cover the down payment and closing costs of the bigger property–say 15% to 20% of the total cost of the larger property,” he says.
In some cases, homeowners can move into a larger home without having to dramatically increase their income. “Most people’s incomes tend to be higher when they trade up, but not always,” says Flateau. “If the price of the new property is a lot higher, then you probably need more income, but if you put more money down, it may be different.” In fact, a higher down payment on the larger property allows you to finance