I see people with $300,000 equity in their homes and $1000.00 in the bank. When they refinance, they are obsessed with getting the lowest rate and the lowest fees and the lowest payment, but they are not looking at the big picture and they complete their refinance, and they leave all of their equity in their home.
The rule of thumb is that banks only want to lend you money when you don’t need it.
If you lost your job or got into debt and messed up your credit score the banks either won’t lend you money or they lend it at a very high interest rate. The smartest thing to do especially when rates are so low is to take a little extra cash out and set it aside for emergencies. This will help protect your house in the long run. If you are unable to make your payments it doesn’t matter how much equity you have in your home, the bank forecloses on you, and you lose out on most of your equity. If you have money set aside to make your payments, then you are much safer than having all your equity in your home.
Home repairs, maintenance, and upgrades. If you live in a condo there is a Homeowner’s Association Fee or Due. This is something paid each month by the owners so that there is money set aside to make needed upgrades and repairs. Homeowners should set up this same account. I see most people go into debt because they need to make needed home repairs and never set the money aside. Many home repairs when gone neglected cause further damage to the home and end up costing even more money. Your home is a great investment, but it also requires money to keep it in good condition.
When you refinance it is a perfect time to set aside some money for future repairs and then make it a habit to continually add to this fund. Create your own homeowner’s account so you know you have the money you need and you don’t need to take on high interest rate debt when your home needs repairs.