If you have equity in your home but a low balance in your savings account, you may consider refinancing your home in order to take some of that equity and set it aside as an emergency fund in a savings account. Accepted wisdom says that you should have enough money set aside to cover six months of expenses. While you can take cash from a refinance for this purpose, consider it carefully before doing this.
The amount of equity is a factor in deciding if a homeowner can refinance his home and take out cash for any purpose. While cash-out refinance mortgages were once easily available, banks have tightened requirements for these after the mortgage crisis. To qualify for the best rates, a homeowner should take a mortgage for no more than 80 percent of the home's value. If a bank approves a homeowner for more than this, it usually comes at a higher interest rate or with higher fees.
A homeowner must have acceptable credit to qualify for a cash-out refinance of his home. Acceptable credit varies depending on the mortgage lender and the type of loan. If you have missed payments, or have higher credit-card balances than when you first financed your home, you may not qualify for a cash-out refinance.
Borrowing to build a savings account may not be the best idea. If you experience an income loss, you may cover it for a while with your savings balance, but if you run out of funds and cannot make your mortgage payment, you will lose your home. Since you have borrowed additional money against the home, you could owe more than your home is worth. Even if your income stays the same or improves, you will probably be paying interest on the amount you borrowed for savings. Closing costs on the mortgage will also add to the expense.
Consider a home-equity line of credit. It can provide cash if you need it for an emergency. The closing costs are lower than with a mortgage refinance, and you will not pay interest on the money if you do not need to use it. Rearrange your household budget to divert more money to savings in order to build the account balance. Consider taking on a second job and putting the earnings into savings if you want the security offered by the extra cash.
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