What is a cash-out refinance?

A cash-out refinance is when you take out a new loan to replace your current mortgage. The new loan is for more money than you owe on your current mortgage, and you use the extra money to pay off debts or make home improvements. For example, let’s say you have a $100,000 mortgage with a $50,000 balance. You could do a cash-out refinance for $150,000. The new loan would pay off your old mortgage and give you $50,000 in cash that you can use for whatever you want. If you were wondering how does a cash out refinance work, then there is a lot of information online that will help guide you through the process. There are several reasons why someone might want to do a cash-out refinance. Maybe you need to consolidate your debt, or you want to make some home improvements. Maybe you’re looking for a way to pay for your child’s college education. Whatever the reason, there are some things you should know before you decide to do a cash-out refinance.

When is a cash-out refinance a good option?

A cash-out refinance is a good option if you have equity in your home and you need to consolidate your debt or make some home improvements. If you have a lot of high-interest debt, such as credit card debt, a cash-out refinance can be a good way to consolidate your debt and get a lower interest rate. You can also use the extra money to make home improvements, which can increase the value of your home. However, there are some risks associated with cash-out refinancing. One risk is that you could end up owing more than your home is worth if the housing market declines. Another risk is that you may not be able to afford the higher monthly payments if interest rates rise. Before you decide to do a cash-out refinance, it’s important to talk to a financial advisor to see if it’s the right option for you.

How to qualify for a cash-out refinance?

To qualify for a cash-out refinance, you will need to have equity in your home. Equity is the difference between what your home is worth and how much you still owe on your mortgage. Some people try to do a cash-out refinance without having equity in their home, but this is not a good idea. If you don’t have equity, you will likely be denied the loan or you will end up paying a higher interest rate. To get approved for a cash-out refinance, you will need to have good credit and enough income to make the monthly payments. You will also need to have enough equity in your home. If you are unsure if you qualify, it’s a good idea to talk to a mortgage lender to see if a cash-out refinance is right for you.

What can you do with the extra cash?

Once you have a cash-out refinance, you will have extra cash that you can use for whatever you want. Some people use the money to consolidate their debt, while others use it to make home improvements. You can also use the money for anything else you want, such as a new car, a vacation, or college tuition. It’s important to remember that you will need to make monthly payments on your loan, so make sure you use the extra cash wisely. Sometimes, it can be tempting to spend the extra cash, but it’s important to remember that you need to make monthly payments on your loan. If you use the extra cash wisely, a cash-out refinance can be a good way to get the money you need.

What does failing to comparison shop among lenders mean?

When you’re looking for a cash-out refinance, it’s important to compare rates and terms from different lenders. Some people fail to compare the shop among lenders, which can end up costing them more in the long run. When you compare rates and terms, you can make sure you’re getting the best deal possible. It’s also a good idea to talk to a financial advisor before you decide to do a cash-out refinance. A financial advisor can help you understand the risks and benefits of cash-out refinancing and help you decide if it’s the right option for you. Failing to comparison shop among lenders means that you could end up paying more in interest and fees. It’s important to compare rates and terms from different lenders to make sure you’re getting the best deal possible. When you compare rates and terms, you can make sure you understand the risks and benefits of cash-out refinancing.

Why you shouldn't drain too much equity

If you have a lot of equity in your home, you may be tempted to do a cash-out refinance for a large amount. However, it’s important not to drain too much equity from your home. If you take out too much money, you could end up owing more than your home is worth if the housing market declines. Additionally, if interest rates rise, you may not be able to afford the higher monthly payments. Before you decide to do a cash-out refinance, it’s important to talk to a financial advisor and make sure it’s the right decision for you. Taking out too much equity can be risky and may not be the best decision for your financial future. 

Conclusion

So, as we have seen, a cash-out refinance can be a good option if you have equity in your home and you use the extra cash wisely. However, it's important to compare rates and terms from different lenders to make sure you're getting the best deal possible. If you want to do a cash-out refinance, it's also a good idea to talk to a financial advisor first to make sure it's the right decision for you. Thanks for reading. We hope this has been helpful. 

Finance Monthly speaks to Jo Butler, Chief People Officer at ASOS, about the new measures and what else businesses can do to support people during menopause.

What initially prompted ASOS to introduce a policy for staff experiencing menopause? 

"Our mission at ASOS is to give people the confidence to be whoever they want to be. Part of this is recognising that sometimes people will need our support when they’re going through big life changes, transitions or challenges. 

"We wanted to ensure that our people knew we were here for them as a progressive employer, no matter what and every step of the way.

"Our menopause policy was therefore launched as part of a broader suite of support, including for pregnancy loss, fertility and other life events, including but not limited to gender reassignment, cancer treatment and escaping domestic violence."

Despite menopause being a natural part of many people’s lives, it's still a big taboo, especially in the workplace. Do you think people going through menopause will have the confidence to request the flexible working and other support that ASOS is now offering them? 

“It is something we will need to keep working on, but by openly discussing issues such as the menopause, acknowledging the challenges and experiences people may feel and creating an environment where people feel they can ask for the support they need within a clear framework, we hope to make good progress.

"It’s really important for us that our policies were written with everyone in mind, not just the majority. This is why our new suite of life event policies are gender neutral. The aim of calling this out is not only to directly support our trans and non-binary ASOSers but also to educate and remind our cisgender ASOSers that these issues are universal. For menopause specifically, we also recognise this affects people across the age spectrum”.

Your menopause policy will undoubtedly support and empower many individuals. What else can businesses, large and small, do to support people during menopause?

"We take our role as an inclusive business very seriously and continue to celebrate and promote diversity, equity and inclusion both for our customers and our employees. At a fundamental level all organisations - large and small - can start by creating an open environment where people feel empowered to talk about the issues that matter to them.

Jo Butler, Chief People Officer at ASOS - Image courtesy of ASOS

"We have a number of workplace equality networks at ASOS - communities which embrace and celebrate all of our wonderful ASOSers and allies. The networks are places to share, to talk, to ask questions, or just to be seen. They provide a safe space for people to talk about their experiences in a confidential environment, feed into the creation of policies and provide a voice to help guide and shape our approach to these issues.

"We also work closely with a number of external experts in this space, including Inclusive Companies, to help us on our journey to being the most diverse ASOS we can be. Through harnessing best practice and innovation, we want to empower all our people to bring their authentic selves to work, every day, and to drive inclusion for all."

Jason Varney, Corporate Partner at Thomson Snell & Passmore LLP, explores some of the most useful funding sources for business acquisitions.

Although pursuing an M&A transaction may not currently be on every company’s “key priorities” list given the current economic uncertainty as a result of the COVID-19 pandemic, such times do inevitably bring about a number of consolidation opportunities – whether that be as a result of a company insolvency and subsequent fire sale of its business and assets, or through the need to take better advantage of economies of scale by merging two similar businesses.

Whatever the reason behind the proposed business acquisition, a share or business purchase agreement is unlikely to be touched by ink until the acquirer has secured acquisition finance.

There are numerous ways that an acquiring company can secure funding for a business purchase, but the key sources we tend to see in our M&A and finance practice are as follows:

Cash reserves

As the old saying goes, “cash is king" – and this is still the case when acquiring a business. Although the vendor of said business will likely, if well advised, require evidence proving the availability of cash reserves to fund the acquisition before signing any documentation; the fact that third party funders do not need to be involved in the acquisition itself means that this is by far the simplest way to fund an M&A transaction.

As the old saying goes, “cash is king" – and this is still the case when acquiring a business.

Debt finance

Debt finance comes in a variety of forms but in essence it involves the borrowing of money and paying it back with interest. The issues to consider when entering the market for acquisition finance are what debt products are available and what is affordable for your business. Incurring debt means providing for the regular expense of loan repayments and will invariably involve a certain amount of control by the financier. In addition, any already existing finance facilities may contain restrictions on further borrowing which may make it difficult to borrow enough money to finance a large acquisition entirely through debt.

Typically cheaper in the long term than issuing equity and advantageous from a tax point of view (as principal and interest repayments are usually tax deductible), issuing debt has many other benefits. Ultimately, the borrower retains control and ownership of its business; once the loan is paid back the borrower’s relationship with the lender ends and the company ceases to be subject to the financier’s restrictions. The lender’s return is fixed, any profit after repayment of debt is for the shareholders.

Depending on the complexity of an acquisition transaction, borrowers may choose the path of incurring senior debt, which typically carries lower interest rates depending on the collateral. Another way of raising finance is issuing bonds or raising mezzanine finance, which is used to fill the missing gap in acquisition finance structures. The riskier a transaction is, the higher the interest rate a lender will typically charge. Interest rates are currently at historic lows, so the cost of borrowing can be low.

Equity finance

A key benefit of raising finance through the issue of further shares in the acquiring company/corporate group (rather than through debt finance, as detailed above), is that in the majority of cases such an investment would not need to be paid back to the relevant investor. The downside, of course, is that the new shareholder(s) will want to see a return on their investment (by way of a preferential dividend, ordinary dividend and/or a capital gain) and most will want some input into the management of the company (whether by way of voting rights or a shareholders’ agreement containing veto rights).

[ymal]

If the newly acquired business which was funded through equity finance is a success, both the existing and the new shareholders are likely to benefit from such success; but it is in situations where such an acquisition fails to provide the benefits that were envisaged (or where the “failed” acquisition starts to put the wider corporate group under financial pressure), that tensions between the investors will start to emerge. In such circumstances, it is imperative to have a detailed shareholders’ agreement in place to manage any disputes between the investors should the company or its group take a turn for the worst.

How best to fund my acquisition? 

Ultimately, the final decision as to how best to fund an acquisition really depends on a number of considerations – such as the market, availability and cost of debt, investor appetite, the company’s current gearing (being the ratio of a company’s debt to its equity), etc.

When considering acquisition funding it would be wise for companies to seek advice not only from lawyers but also, in regards to larger acquisitions, from a corporate finance house; as most companies would benefit from corporate finance input at some stage during their life-cycle.

 Though it’s exciting to think about the additional efficiencies your business will gain in absorbing or being absorbed by another company – such as increased capital, wider market reach, economies of scale in production and manufacturing, increased technological capacity, and more – it is important to get to know the company you are merging with first. You want to make sure that it’s a safe and sound transaction, and mutually advantageous to both parties. You wouldn’t want to get married to a person with skeletons in the closet, after all.

The following two tenets are probably the most important things to consider when talks of a merger are in the works.

1. Ask yourself the question: are your businesses a good fit? Why?

How would partnering with each other improve your brand equity, as well as your bottom line? Here, you get to kill two birds with one stone. The first job is to assess how reputable the partner company is deemed by the general public. Would partnering with them align with your company’s values and ethos? Will you still be regarded by the market as the honourable enterprise you have always been seen as, or maybe even improve how you are perceived? Do the brands banding together create the image you have always wanted to be seen by your customers?

Also, will the combination of your businesses increase efficiency overall? Will it contribute to an improvement of your business? Will it be a boost to the company’s overall profitability? Answering these questions in a positive way are the basic and most important concerns you need to cover from the beginning.

2. Take into account all the objective financial considerations.

Of course, there are a lot of figures that need to be studied when getting into a merger. Basically, you have to make sure that a company’s assets, liabilities, and equity are all that they declare them to be. Make sure that assets standings are accurate, are not over declared, major capital investments such as equipment or real estate values are declared as well as corresponding depreciation and amortization for these, not to mention other deeds, title policies, and permits.

[ymal]

Liabilities are also very important to consider. Make sure you have a detailed schedule of all short and long term debt, a full list of creditors and suppliers, corresponding terms and interest rates, and most importantly, the company’s current standing in terms of ability to pay these creditors.

These details can be pretty tedious; so it is wise to hire the appropriate accountants, lawyers, and due diligence companies such as Diligence International Group. It may be an expense for you up front, but it should be seen as an investment – it is better to have all important details ironed out in the beginning before getting into any binding contracts.

These two are probably the two basic pillars in assessing and properly evaluating your merger. The rest may fall under these two categories, such as company culture and corresponding effects on your human resource team, their corporate social responsibility and environmental sustainability practices, patents and other intellectual property concerns, among others.

Here Chris Heerlein, author of Money Won’t Buy Happiness – But Time to Find It,  and Investment Adviser Representative and partner at REAP Financial LLC, provides expertise on the little known tax breaks you could be making the most of.

The Tax Cuts and Jobs Act of 2017 gives us a lot to think about when crafting a financial framework. With the legislation scheduled to run through 2025, you want to be aware of certain provisions and exceptions in the tax-reform law and how you can take advantage of them.

State taxes

The tax-reform changes impose a $10,000 limitation on the deduction of state taxes. The IRS says that maximum does not apply to property taxes imposed on business property. For those of you with home offices, to the extent that you can allocate real estate taxes on your home to that office, understand that’s deductible outside or above the $10,000 limit.

Home equity lines of credit

If you take out a home equity line and use the proceeds to reinvest in your home, such as a new kitchen or a new wing in your bedroom, the interest remains deductible. But if you use those proceeds to, say,  pay off college tuition or credit cards, there’s no allowable deduction. We see families borrowing money on their home to use for repairs, improvements, and sometimes even to cover retirement income and keep their tax bracket under control. Borrowing home equity can be good, but you need to keep track of what you’re doing with the proceeds because if they’re invested in the home, you can still take a deduction.

Charitable contributions

These are deductible, as they always were, but the reason to be concerned about this category is the doubling of the standard deduction. Prior to the new tax law, only about a third of people in the United States actually itemized deductions. And after this increase in the standard deduction, guess what? It goes down to less than 10% of Americans.

Think about that: 90% of people will claim a standard deduction. Now, why does that affect charitable contributions? Well, as you may know, you can claim a deduction for a charitable contribution only if you itemize. If you don’t itemize and take the standard deduction, you get no tax benefit for charitable contributions. But here are some workarounds:

For people over the age of 70 ½ — the age when you have required minimum distributions on your IRAs and 401(k)s — there’s something called a qualified charitable distribution (QCD), and you can take up to $100,000 out of your IRA each year and basically have it sent directly to a qualified charity. This is a wonderful strategy for families that give small amounts and large amounts. And you avoid all tax on that distribution that ends up at the qualified charity. You can claim the standard deduction and still avoid tax on the IRA required distributions, but remember, the first dollars you give to charity should be money out of your IRA.

What about those of you younger than 70½? Here’s what you might want to do. This is a little outside the box but it’s a powerful strategy. Bundle several years or so of contributions to your qualified charity. Let’s pull five years out as an example. You can actually bundle these contributions into a single year so that you will go over the standard deduction in that one year and claim a deduction for the excess contributions. A Donor Advised Fund (DAF) is when families put money into the fund, they get the full tax deduction for whatever goes into the fund that year, plus they can distribute that money over time, at their direction. I recommend this a lot of times to clients, especially those taking the standard deduction.

Entertainment and meal expenses

There are some big changes when it comes to entertainment expenses and meal expenses. The new tax law disallows any deduction for entertainment expenses period. Meals — an integral part of business dealings, of course — are a bit different. The IRS says you can still deduct the meal expense as long as you have a separate receipt. Going forward, make sure that your food costs for clients are separately stated on those invoices and receipts. That’s a big one and can add up fast.

Then there’s the very important SSA-44 Form. Let’s say you’re a high-wage earner and you are going to work half the year when you retire at 65. You get off the employer health care plan and go on Medicare. Well, the government dictates your Medicare premiums by how much income you report. If you go over these thresholds, you are going to get a letter in the mail that says, “You’re Medicare premiums are going up.” And I’m talking perhaps $500-plus per person more for the same coverage your neighbor is getting. The SSA-44 Form is something you would file with your tax return in a year that you retired and were over these income limits, and they’ll give you a once-in-a-lifetime exception around those limits.

Limited partners in private equity funds should be wary of putting managers under pressure to deploy capital – that is the conclusion of new research published today by eFront, the world’s leading alternative investment management software and solutions provider.

eFront’s research shows that there is an inverse correlation between the level of capital deployed during the first year of a fund’s investment period, and its eventual performance.

Looking at US LBO funds of vintage years 2000 to 2010, on average, funds deploy more capital in the first year (29%) than during each of the following ones. Years 2 and 3 are roughly at par (20%) and the amounts decline consistently thereafter (Figure 1). At first glance, the recent increase in pressure from fund investors to deploy capital would not imply a radical change of behaviour from fund managers.

Figure 1 - Yearly and cumulated capital calls of US LBO funds (vintage years 2000-2010)

However, a deeper look shows that the amount deployed in Year 1 fluctuates, from 14% (vintage year 2010) to 38% (2000). Surprisingly, the capital deployment in Year 1 does not seem to be connected with macroeconomic conditions: the coefficient of correlation with US GDP growth is only 0.19. However, there is an inverse correlation, of -0.32, between the amount of capital deployed in Year 1 and the overall performance of funds (Figure 2). This correlation increases as funds mature, with older funds (2000-07) showing a stronger inverse correlation of -0.46.

Figure 2 - TVPI and 1-year PICC of US LBO funds (vintage years 2000-2010)

This analysis raises some important conclusions on drawdowns, demonstrating that under pressure from investors, fund managers might have less freedom to select the best opportunities over time. Even though fund managers usually have a pipeline of potential investment opportunities when they raise new funds, there is no certainty about when these opportunities will materialise. Putting pressure on fund managers to deploy capital could thus lead them to execute investments they would have normally decided to pass on.

Interestingly, Figure 1 shows that a significant amount of capital is called after the usual end of the investment period of LBO funds. In Year 6, 7% of the committed capital is called on average. The most obvious reason associated with an extension of an investment period is that fund managers struggled to deploy capital during the usual five years.

Figure 3 - Multiples on invested capital of European and North American secondary funds

Surprisingly, funds of 2000, 2001 and 2010, which deployed respectively 102%, 98%, and 90% after five years still called 15%, 11% and 9% of the committed capital in Year 6. In theory, at this point, the remaining capital to be drawn to pay the management fees during the divestment years would be insufficient. The logical conclusion is that fund managers decided to use the provision of their fund regulations, allowing them to recycle early distributions operated during the investment period to effectively invest up to 100% of the committed capital. This is clearly the case for 2000, 2001, 2008 and 2010.

Another explanation is that some fund managers might execute buy-and-build strategies. Fund regulations in effect prevent new investments after the investment period, but usually, allow reinvestments in existing portfolio companies, including to support acquisitions.

Tarek Chouman, CEO of eFront, commented: “This analysis debunks some common assumptions about drawdowns. One of them is that fund investors have put an increased pressure on fund managers to deploy more capital faster. Given the fact that most of the fund regulations cap the capital deployed in any given year at 25-30% of the committed capital, it is difficult to see how much further fund managers can go in that respect. What is also clear from the analysis is that having the freedom to deploy or not is an important tool to invest for fund managers.”

(Source: eFront)

She's only the second African-American female broker in the Exchange's 226-year history. According to a 2017 study by Stanford University, men comprise 75% of the wealth management field and fill more than 80% of leadership roles.

In light of last week’s events surrounding markets and Brexit talk, Rebecca O’Keeffe, Head of Investment at interactive investor comments for Finance Monthly.

There is no doubt that President Trump has been highly positive for US equity markets, which has fed through to rising global markets, but his increasingly erratic behaviour is making it very difficult for investors to work out whether he remains a friend or foe. His America first policy is designed to play well at home, but in classifying the rest of the world as competitors rather than allies, he has increased tensions and raised geopolitical risks for investors.

Bank of America, Blackrock and Netflix all report second quarter earnings today, which may provide further clarity for financials and the outperforming technology sector. Mixed results from three of the big US banks on Friday saw bank stocks fall, so today’s figures from Bank of America should provide further clarity for financials. Technology stocks have been the place to be invested in the first half of the year with the Nasdaq up over 13% compared to relatively flat performance elsewhere. The first of the FANGS to report, Netflix earnings are hugely important for investors to confirm whether the outperformance of technology stocks is warranted or if the market has got ahead of itself.

Calls for a second referendum and a coordinated effort by Brexiteers to undermine Theresa May’s policy and position means this could be a make or break week for the Prime Minister. Having set out a radical plan to seek what she believes is the best possible deal for the UK economy, Theresa May must now try to sell the deal to parliament this week. The hard-line Brexiteers have already indicated their objections, but they could also instigate a direct challenge to May’s leadership if they can secure the 48 Tory MP signatures necessary for a leadership ballot. After months of failed negotiations and an increasingly divisive government, this week is pivotal for Theresa May.

Today Rebecca O’Keeffe, Head of Investment at interactive investor, reports on the latest market updates, with expert insight into import/exports markets and investment.

“Equity markets are under significant pressure in early trading as the global trade war is expected to come into clearer focus this month.  In Europe, various leaders face acute political pressures of their own, with Angela Merkel struggling over immigration concerns and Theresa May facing another perilous month of Brexit negotiations.  Previously, investors have used significant market falls as a chance to buy the dips, however, with all these headwinds, it is difficult to view current market weakness as a buying opportunity.

“After spending weeks not fully pricing in the downside risks, as investors hoped that there would be a last-minute reprieve rather than a global trade war, investors are waking up to the potential reality of a trade war and what that means for the wider markets. Falling Chinese exports will subdue the commodity markets, individual tariffs will markedly affect sectors and their wider supply chain, and the prospect of a downward spiral is very real.

“After largely surviving the pressure during the first half of the year with markets broadly unchanged, investors may find that the second half of the year, including the unpredictable summer months, may prove even more volatile than usual, delivering some opportunities, but increasing the threats for investors.”

The snap UK election in June and the second round of voting in France in May are galvanising investors to buy physical gold to protect against the uncertain election outcomes, according to investment firm The Pure Gold Company.

Chief executive Josh Saul said: “This past week has seen a surge in gold buyers, and this morning especially, our clients are looking to take advantage of a drop in the gold price as the French presidential polls favour moderate candidate Emmanuel Macron.”

“People purchasing gold this morning and taking advantage of a lower price remember that Clinton lead Trump in the polls and the Remain camp led over the Leave voters. The polls have been an unreliable indicator in the last few momentous votes and the general sentiment is that if people can find a way to hedge themselves with gold at a discount then they will heed the opportunity. We've seen many clients who purchased last week place orders this morning in order to reduce the overall average price that they have bought at.”

“43% of people purchasing gold have been first time investors who say their motivations for buying gold is to remove exposure to equities. They’re worried that a Marine Le Pen victory in France, uncertainty over the UK's general election in June or an escalation in hostilities between N Korea and US could result in a considerable decline in global stocks. People are purchasing gold as a hedge against these events occurring whilst hoping that they don't. This is especially true for retirees. We have seen a 105% increase in people purchasing physical gold through their SIPP or Pension in the last seven days to protect their investments from election uncertainty.

“Our largest order last week was a single purchase of £1.3m of 1oz gold Britannia's. The client was driven to invest in gold by "elections everywhere he looks." He is convinced that somewhere, at some point (soon), there will be a crash and he wants to ensure that some of his wealth has been removed from the financial system. His motivation is not to make money but instead to protect himself against financial volatility. Still, he does believe that the gold price will perform similarly to last year, and he wants to ensure that if the value of his gold grows he manages this growth in a tax efficient manner, hence his preference for tax free UK gold coins.”

(Source: The Pure Gold Company)