A cash-out mortgage refinance lets you borrow more than you currently owe and keep the difference as cash. It’s one way to unlock the equity in your house. However, doing a cash-out refinance to buy stocks is not a good idea. You could lose a lot of money in a bear market.
Instead of doing a cash-out refinance, you can take out a Home Equity Line Of Credit (HELOC). However, I don't think a cash-out refinance to buy stocks is not a prudent financial move Especially not with stocks at record-high valuations and such lofty earnings expectations post the worst of the pandemic.
The most you can borrow from your house is usually an 80% loan-to-value (LTV). In other words, if your home is worth $1,000,000, and you have a $500,000 mortgage, the most you can refinance would be $800,000 and receive $300,000 in cash.
Cash-out Refinance To Buy Stocks: Bad Idea
Thanks to the coronavirus, the 10-year bond yield declined to near all-time lows and has stayed relatively low even as the economy recovered. Therefore, the desire to do a cash-out refinance to buy stocks and other things is increasing. I caution you not to do so.
Due to luck, in 2019, we ended up buying a larger house with cash. With a second child on the way, we figured why not buy the house a block away if we could get a good deal. The cash we paid ended up saving us from this hopefully temporary market meltdown.
The question now is whether it would be wise to do a cash-out refinance and pull out lots of equity to invest 100% in the stock market. A lot of people have been asking me this question lately with the S&P 500 near all-time high.
If you are thinking of doing a cash-out refinance to buy stocks, here are some of my pros and cons.
Pros Of A Cash-out Refi To Buy Stocks
1) Lock in massive outperformance.
Let's say the S&P 500 is down 10% for the year and you were to purchase stocks. You would instantly lock in 10% outperformance on your cash-out capital. No matter whether the S&P 500 continues to go down or up, you will always be outperforming.
Although it's better to always make money when it comes to investing, the next best thing is outperforming the index or your peers. If an active fund manager outperforms his benchmark by 10%, he will be in the top 1% of active fund managers. Given his performance, he'd probably get a record bonus, attract a massive amount of assets, and be given many awards for the year.
To gain true wealth, you must outperform the average, otherwise, you'll always be just average.
Related: Active Versus Passive Investment Returns In Equities & Fixed Income
2) Take advantage of low interest rates.
The Fed cuts interest rates to spur economic activity. The lower interest rates go, the more people and businesses tend to borrow to buy equipment, property, goods, and services. Doing a cash-out refinance to spend is in a way, following the Fed's desires.
If inflation is running at 2% and you can get a mortgage rate at 2.375%, your real interest rate is only 0.375%. The lower the real interest rate hurdle, the higher the chance of earning a greater return.
From a nominal return basis, the 2.375% mortgage interest rate drag on returns is comparable to paying a traditional wealth manager to manage your wealth or investing in a hedge fund which charges 2% of assets and takes 20% of profits.
The thing is, mortgage rates are high now thanks to inflation. As a result, it makes cashing out to buy stocks even more expensive.
3) Diversify net worth.
If you have a large percentage of your net worth in real estate, you may want to do a cash-out refinance to diversify your net worth. At the end of the day, the right net worth allocation by age is the biggest determinant of building wealth.
Note that your real estate exposure will only decrease based on your increased exposure in stocks. Your absolute real estate exposure won't decrease since you haven't sold any properties. You just have more debt.
I've got roughly 30% of my net worth in stocks and 40% of my net worth in real estate. I would like to bring the percentage up to 30% if stocks sell off again. However, doing a cash-out refinance to buy stocks doesn't seem like a good idea.
4) You could get a tax deduction.
The mortgage interest deduction may be available on a cash-out refinance if the money is used to buy, build or substantially improve your home.
In general, homeowners who bought houses after Dec. 15, 2017, can deduct interest on the first $750,000 of the mortgage. Claiming the mortgage interest deduction requires itemizing on your tax return. As always, check with your accountant.
Negatives Of A Cash-out Refinance To Buy Stocks
1) Refinancing takes time and costs money.
It takes between 1 – 4 months to do a cash-out refinance. Depending on your mortgage rate, your fees will either be baked into your cash-out refinance or you will have to pay fees. Closing costs usually cost between 1% – 4% of your mortgage. If you don't have a good one, dealing with a bank can be a PITA.
By the time you've got your cash, the stock market may have moved up to the point where it is no longer attractive to buy. If you don't use the cash, you'll then end up with a cash drag.
Here are all the mortgage refinance fees when doing a no-cost refinance. Refinancing generally costs at least $2,000 and up to $8,000.
2) You could lose money.
As we all know, there are no guarantees when it comes to investing in stocks or any risk assets. Stocks have a fantastic way of quickly losing value, which is why I always encourage folks to practice taking profits to pay for a better life.
I could lock in a 10% outperformance, but if I lose 10% on let's say $1,000,000 from a cash-out refi, I'm not going to be happy. I would have rather kept the $1,000,000 locked in the house and have it outperform by 20% without doing anything. Even if I were to make 10% with a stock rebound, making $100,000 may not bring me much joy.
You do not want to lose money on margin. This is how people lose everything.
3) Increase foreclosure risk.
If you end up losing a ton of money in the stock market after your cash-out refinance, you might reach a point where you are no longer able to pay your mortgage.
Because your home is the collateral for any kind of mortgage, you risk losing it if you can’t make the payments.
4) You complicate your finances and your life.
One of the reasons why I've never regretted paying off a couple of my mortgages is because each time I paid one off, I was able to simplify my finances. It feels phenomenal to pay off debt. To not have to manage another account is like icing on the cake.
The older and wealthier I get, the more I want to simplify my finances. My goal is to pay off all mortgages by 2027 when my latest 7/1 ARM refinance resets. I'm no longer in the business of trying to take as much leverage as possible to make money. Instead, I'm in the capital preservation stage so I can live as financially stress-free as possible.
Don't Do A Cash-out Refinance To Buy Stocks
Conducting a cash-out refinance to buy stocks is a suboptimal financial move. Yes, stocks tend to provide an 8% – 10% annual return over the long run, but you could face a negative sequence of returns after your purchase.
If you absolutely want to use some of your home equity to buy stocks, then I would wait until there is at least a 30% correction in the S&P 500.
I use 30% as a benchmark because the average bear market since World War II has seen a 32% decline. Therefore, if you buy stocks with your home equity after a 30% decline and can hold on for at least a year, you will probably make money based on history.
We saw a 32% decline in March 2020. And it could happen again, especially after the S&P 500 has roared back so strongly.
Just make sure that if you plan to do a cash-out refinance to buy stocks that you also have enough liquidity to survive. When stocks are down 30% or more, the economy is down in the dumps. During this time, you might lose your job and your other investments may also lose lots of value.
Cash-out Refinance to Pay Down Debt Instead
The wisest thing you can do with your cash-out refinance is to pay off higher interest rate debt, if any. Given the average credit card interest rate is still a whopping 17%, your guaranteed return is probably greater than the average return in the stock market.
I plan to keep life simple and live in our new home without carrying a mortgage. It feels good not having to make any mortgage payments. It also feels good to provide an appropriate amount of shelter for my family. I don't really care about my house's value because I plan to own it for decades.
As for stocks, I've already used up a majority of my excess cash to buy the ~12% correction. if the S&P 500 corrects by 20% (<2,700), I will start selling my muni bond funds and buy stocks. It's a decent trade since the muni bond funds will have performed quite nicely in such a scenario.
If the S&P 500 corrects by 30%, I may consider doing a cash-out refinance because that means mortgage rates have gone even lower! Whatever happens, I'll always be investing some of my monthly cash flow into the market.
Bottom line: Don't conduct a cash-out refinance to buy stocks. Do always have enough cash on hand to take advantage of random investment opportunities. Do refinance your mortgage when Treasury yields fall to all-time lows. And hold onto your property for longer if you've locked in a great mortgage rate.
Cash-out Refinance To Buy Real Estate
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income.
Real estate is also less risky than stocks. Therefore, you may want to do do a cash-out refinance to buy more real estate instead. This is what many people have done to build wealth over time. You just have to do so in a prudent manner.
Instead of buying another property with a mortgage, consider buying real estate more surgically through real estate crowdfunding instead.
Take a look at my two favorite real estate crowdfunding platforms.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the easiest way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
I've invested $954,000 in real estate crowdfunding across 18 different properties to diversify and earn income passively.
Invest In Private Growth Companies
Finally, consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out the Innovation Fund, which invests in the following five sectors:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum.
If you want to do a cash-out refinance and buy stocks, make sure you can withstand a 1-2 year bear market. If you have no problems losing ~30% of your portfolio's value while paying more mortgage interest, then maybe you'll be OK. But I think the better strategy is to keep paying down debt and invest only with the cash you have.
All of the negatives of a cash out refinance to buy stocks are questionable.
1) Refinancing takes time and money.
>> It takes between 1 – 4 months to do a cash-out refinance. Depending on your mortgage rate, your fees will either be baked into your cash-out refinance or you will have to pay fees. Closing costs usually cost between 1% – 4% of your mortgage. If you don’t have a good one, dealing with a bank can be a PITA.
This is true if you do a cashout for any reason, it is not unique to investing in stocks. Using online banks who accept pdfs it’s actually pretty straightforward. Yes you pay fees but you have to analyse the investment as a whole. Paying $20K in fees isn’t that bad if you make $250K in the long term.
>> By the time you’ve got your cash, the stock market may have moved up to the point where it is no longer attractive to buy. If you don’t use the cash, you’ll then end up with a cash drag.
An odd statement indeed. The stock market fluctuates but we’re doing this for the long term and it goes up around 7% annually and has done for the last 50 years.
2) You could lose money.
Stick with low cost index funds and stay in it for the long haul and it’s highly unlikely you’ll lose money.
3) Increase foreclosure risk.
Actually the opposite is true. If I have 20 years left on my loan and I do a 30 year fixed with cashout I can pull out almost half the mortgage and keep my payment the same. If I do that now I have enough emergency fund (stock portfolio) to survive a six to twelve month job hunt without facing foreclosure for not being able to pay my mortgage. On any given day the stock may go up or down but it’s typically going to be close to or more than I took out.
4) You complicate your finances and your life.
Taking one loan and dumping it into a low cost passive fund for 15 years doesn’t seem too complicated to me.
Waiting until the market makes a 30% correction is bad advice. While it’s true that money that goes into stocks after a -30% correction will likely perform exceptionally well over the next few years, the time lost not earning 10% in all those years waiting for a “big bear” correction is crushing. In other words, the person who invested right away can expect to earn 10% for so many years such that, by the time their $ hits a -30% snag, they STILL have more $ than you had getting near 0% all those years you waited.
You may have missed the overall point of this article: Do not cash-out refinance to buy stocks. Buy stocks with new cash instead.
And if you really want to do a cash-out refinance to buy stocks, wait for a correction. The last thing you want to do is cash-out refinance, buy stocks, and then have a correction hit. You double lose.
Related: How To Predict A Stock Market Bottom Like Nostradamus
A more diligent response would have been that while waiting for a 30% decline in the market would be ideal, that it is not necessary. And furthermore that since this happens so infrequently that you’d be more prudent to not wait, and get in the market asap.
Interesting post. I am considering doing a cash out refi on my rental property and take the cash to either buy another rental or invest in crowdfunded real estate. I understand that the cash from the refi can be used to as downpayment for a new rental, and the interest payment (on the loan for the cash-out portion) is tax deductible.
What I am interested in finding out is if I can use the cash to invest in crowdfunded real estate, and deduct interest payment for tax purposes. This seems to be a gray area. Do you know/can you comment on whether the cash invested in crowdfunded real estate can be considered as down payment?
Thanks.
The article glosses over a handful of good reasons for putting cash out refi money into the market:
1. Asset diversification: Real estate was too large a portion of our portfolio.
2. Asset protection. Depending on specific state homestead laws, a fully paid off personal resident generally doesn’t offer good protection against lawsuits and personal liability claims. That’s why equity stripping exists. We didn’t need much cash, so it ended up in tax deferred retirement accounts which are well protected from creditors.
3. Increasing cashflow. My cashout refi went in the direction of longer term and higher interest (yep, that’s right. The last refi had ridiculously good terms.) because it will become a long-term rental property in the next one or two years. The new financing guarantees it will cashflow immediately.
4. ROI. Home in our area have been increasing at 8% annually for the past six years with no signs of slowing down. Since the equity increases regardless of outstanding debt, I don’t see the downside of diversifying equity into the stock market with even higher long-term returns.
This was all finalized long before COVAD-19 and has nothing to do with the current stock market swings. It’s part of a long-term financial plan. I think Sam comes to a more negative conclusion on the tactic because he’s viewing it entirely as a way of taking advantage of the recent market drop. Agreed that taking on additional debt to speculate is almost always a really bad idea.
Another Great article! Thank you for sharing.
I live in Belgium, Europe.
I own several small and large rental properties since 2003-2005 with loans with -3/+3% interest rate, they are at 0% interest rate since 2015. I havent paid interest on those loans since 2015. property values have gone up significantly since 2015, and investors prefer real estate because of low interest rate and stock market overvaluation. since 2017: a commercial property loan is at around 1% interest rate, a private property between 1-2%.
This is all in Belgium, Europe.
Since 2009, I also own a home in Tucson, AZ, had to pay 50% down. paid of my home-mortgage in 2019 because I was done with the high interest rate as a foreigner of 5.125% (all my income is made in Europe).
If anyone knows a US bank that is willing to lend at better terms to buy US rental properties, would love to hear!
I agree that it is not straight forward. But if you truly believe that it never makes sense to refi to invest in stocks then you must also believe that it always makes sense to pay as much as possible on your mortgage payment, and invest nothing until you are debt free.
At the end of the day they Amin t to the same thing. If I believe I can beat my mortgage rate investing in stocks, then I make minimum payments and invest the difference. If I don’t then I pay down the debt. If I acknowledge my uncertainty I invest some in both options according to my confidence in each.
My response is sometimes it makes sense to refi to invest, sometimes it doesn’t. If you can get a 2.75% 15 year cash out and invest in foreign markets with low shiller PE ratios (high 10 year return projections) go for it. But many people aren’t in that situation.
Sam, what do you think about the Fundrise iPO and did you invest during the recent offering?
In my opinion, probably a bit too early to refinance a mortgage as rates will likely continue to move substantailly lower.
Treasury rates should go negative in the US just like in Europe. Can you imagine a 1 or 2% mortgage? Will be basically free money.
Never happened before and I hope so and I don’t hope so. If the 10-year Treasury rate goes to 0%, I’m assuming the S&P 500 will go down by another 20% or more.
UST will hit 0% in the next few weeks with the markets down another 5-10%. Hearing Fed Reserve will cut rates 75 bps at March meeting. ZIRP here we come!
I’ll take the over on that! But if it does happen, I hope you have already sold all your stocks at least!
Fed fund rate futures are pricing in a 65% chance of a 75 bp drop at the March meeting (from 0% a week ago) on Friday and I bet that gets close to 100% this week. Economic activity in the US slowed massively in the last week (-6% trend for my nationwide firm vs prior 13 week avg and we’re one of the most insulated in the industry), I speak with large portfolio managers all the time for my job (IR) and they are freaking out and will only get worse as the #s of COVID19 get larger, sending a flight to UST. We will see zero % interest rates soon, possibly this week. I am 40% equity, 20% bonds, 40% real estate at the moment with my investments, plus a good chunk of cash. Will start moving bond $ into equity soon as bonds are insanely overvalued, way moreso than equity, but the trend is your friend.
Rates are at 0.3% on the 2 year right now, 30 year sub 1, oil down 30%. Still want to bet we won’t see negative rates soon?
So how smart is this guy now?
Hey Sam! Thank you so much for graciously sharing your research knowledge with us! I’m at a point where I’m debating if it would be wise to refinance or instead use the closing costs to invest. I’m sure other homeowners are also thinking about this too. Would be great to see your thoughts on this :) Thanks again for all that you do!
Depends on your numbers! Lay them all out there and we can share our thoughts. There are no decisions made in a vacuum in finance. thx
How do feel about buying raw land with the cash out?
Sam,
Long time viewer, first time caller.
In the UK, have just moved to a job where I should have hella spare cash. In the UK we have an ISA allowance – an ISA’s profits are not taxed, ever (except for earning the money to put in the ISA), so it’s best to max out one’s allowance every year, currently sat at £20k.
The deadline for maxing out my ISA this year is April, but I still have £7k left on my allowance. My plan is to take out an unsecured loan (not a HELOC) of £27k to max out this year and next year while the market has dipped. because I will not get my first paycheck until the deadline has passed.
I’d like to know if, in your opinion, this is an exception to your article – because the ISA allowance is sacred?
Thanks for all of the content, I think I would still be in my hometown earning 6x less if it wasn’t for FS!
Hmmm… I really hate taking out debt to buy ANY risk asset, including stocks. I would rather try and make more money on the side to contribute more.
GL!
Hi Sam I’ve taken out an additional mortgage on my primary home for 20 year fixed at 1.89%. I use the money to buy more shares in ETFs in the next two years. The dividend on the ETFs is even higher than the interest on the mortgage. I plan on holding for 20 years and I think I will make a nice profit in that time frame. Btw I live in Europe.
Wow… that is an incredibly cheap rate. You are right about the attractiveness of stocks when its dividend yield is greater than your debt.
If you can hold for 20 years, you’ll probably be OK. However, dividend payouts will be cut in a recession.
GL!
Great article! I love your thinking outside the box ideas. I am too risk adverse for this, but might take a big chunk of my bond funds and dump back in the market if the market correct 20+% or more. Your analysis on 30% is really intriguing and might pick that as my new bogey. Keep writing articles like this one because it really makes me think!
Robert, this is exactly what I am thinking as well. Two weeks ago I moved a large percentage of our 401Ks into bond funds with the idea that we would hit at least a correction in the short term (10%-20% drop) and now I believe we will hit a mild recession later this year (20%+ drop) or early next year. If and when that happens, I plan to pull from these bond funds and ladder back into the stock market, catching some of the upside as stocks begin to recover once the virus and the elections are behind us.
Sure, no problem. It’s good to think and have a SYSTEM of investing in place when things happen.
Also have lines in the sand regarding stock/index entry points and how much you plan to invest.
Although nobody knows where the markets will go, having a system in places makes investors feel better.
I just locked in a cash our refinance yesterday. I was debating between the 2.875 30yr fixed with no cash out vs the 3.0% with $225k cash out. Opted to go the cash out route as I highly doubt I’ll ever be able to borrow so much money for so cheap again. Not exactly sure what I’ll do with the money yet. Debating going in on some apartment syndication deals, or maybe just moving up in house, or maybe invest in the markets.
Anyone that followed me during my Punch Debt In The Face blogging days knows that I’ve been extremely conservative and risk adverse during my financial journey. I’ve lost hundreds of thousands of dollars because of it. Haha.
My income, net worth, and equity is such that I feel like it’s appropriate to take advantage of leveraging my equity and using financial arbitrage to my benefit for the first time. I’m not gonna do anything dumb obviously. Any move I make is with a long term mindset and I can comfortable afford my new mortgage payment, even if the economy turns sour for the next five years.
Hopefully you meant “lost OUT” on hundreds of thousands of dollars because of it, not actually lost money due to being conservative!
Nice to hear from you. It’s been years!
I just closed on a no cost refinance with cash out of $25k at 3.29% on a 20-year mortgage. I think I could probably get another no cost refinance of close 3% right now. But I haven’t even gotten my paperwork from my new mortgage company yet. First payment is due in April. I’d save $55 a month… worth the trouble or wait for the 2.5% 20 year… haha.
With who? I’m doing a no cost refi right now with us bank and locked in a 2.75% rate on a 5/1 arm a few weeks ago but they require 70% ltv for cash out refi and I need 80% ltv.
I’d love to do this if the stock market keeps dropping. However, my wife would kill me. For a smooth relationship, I’ll pass on cash-out refinancing to buy stocks.
I haven’t had debt in nearly 20 years and this actually crossed my mind last week. Only because we plan on moving from our paid for home in about 5-6 years. I’d never consider if we planned on staying forever, and totally agree the baseline trigger would be a 30% correction. My logic is we would be downsizing about $1M in value (buying a smaller place with the excess proceeds) and I plan on investing into the market at that time for long haul. My logic is if the market corrects in the next few months that 6 years from now the market will be higher. The math says I should do it now anyways, but I really like being debt free.
Is the reason to cash-out because you want to keep your old house as a rental? If not, then best to just sell it.
The reason really is a blogger I follow once wrote about how having $1M in mortgage debt is about the optimal amount. Once the daughter is off to college in 6 years or so we are going to relocate to a more tropical climate as our home base. The home is conservatively worth $2M today, we plan to have a small but spectacular place (2 bed/2 bath) that would cost about $1M. So in 6 years we’d sell and be taking the extra $1M and investing it, and paying cash for the new place. High end real estate does not appreciate in our neck of the woods like on the coasts, short of a total market correction and buying right. So get a ridiculously low mortgage now and start investing today vs. where the markets will be 6 years from now.
Sounds good! I wish you good luck!
I just updated that post btw. The ideal mortgage amount is now only $750,000.
People refinance constantly to buy depreciating assets, i.e. boat, car, motorhome, desert toys, etc. so why not? If you are willing to throw 20% away on day 1 purchasing those assets, might as well grab another $10k and throw it in the market. Worst case it performs similar to the other asset you purchased, and best case, it covers the purchase and then some.
Assuming that is how you function. I would never do any of the above, just thinking…
That’s true, if you want to compare buying stocks after a 15% – 20% correction versus buying a car or a boat, I would go with stocks.
I am in a different camp. I think stocks were over valued at all time highs’ And their PE Ratios showed that. So if they were, does it make sense to cash out refinance? And have these stocks never again see those highs again? You would be borrowing and paying interest and principal for stocks that never regain those overvalued prices. Possibly like Japan for the last 20 years.
Leverage yourself to speculate in a market….. What could possibly go wrong?
I regularly cash out refinance my investment properties and my primary residence to invest in both stocks and real estate and rebalance my portfolio. I prefer refinancing my primary because I get better terms than investment property.
My goal is to have 50% of my net worth in stocks and 50% in real estate. I have almost no bonds; the real estate is my proxy for bonds and diversification.
I deploy capital where I see the most opportunity while trying to maintain the 50/50 split.
As you mention, timing the refi is difficult. I refi when the opportunity arises but may sit on the cash for months while paying interest of course. I think long term. 3.5% interest (on a 30 year mortgage) for 6 to 12 months is insignificant compared to earning 8% return on stocks over 30 years. It’s a cost of doing business.
As for weathering down turns, having the a cash reserve on hand is more important to me than having a lower mortgage payment.
Money Ronin – my exact same strategy as well. Question – if you put the cash proceeds from a rental property refi into stocks, is the full amount of interest tax deductible on the rental property? I’m thinking yes, but curious what others think. They are both investments and you could always make the argument (if you get audited) that the stock investment is simply a reserve fund of sorts for your rental properties. Obviously if you use the proceeds for personal reasons then that portion of the interest isn’t deductible on the property. Thoughts?
Interest on rental property is a business expense and so is deductible.
The approaches talked about here seem right.
For example with a $5 million dollar net worth and a $1 million dollar paid off house it would seem very low risk to cash out $500k and invest it in an asset. Very low cost debt can allow that wealth to work harder for you or your charities.
Well not necessarily. It’s a question of how the proceeds are used, not the asset securing the debt. For example, if you refinance a rental property and use all the cash to buy a boat, you can’t deduct that interest even though it’s secured by a rental property. But I think the way around it, assuming you’re buying stocks with the proceeds, is to view the stock investment as a reserve fund. It’s simply a reserve fund prone to much more growth and volatility than cash.
I’m not an accountant but I am taking the position that the cash out is investment interest since I am using the proceeds to invest.
What ltv do they require and who are you using? I owe $180k on my condo investment property and it’s worth $450k so wanna pull out as much as possible.
I use Wells Fargo for my single family real estate. They have competitive rates and even better when you have large deposits and brokerage balances with them.
Agree Sam. People often confuse luck with brains in a bull market. I know several folks who used their houses like ATMs before the housing crash.
I’ve seen people get rich quick using leverage and I’ve seen people go broke. My bogey is 5 percent. I’ll use cash flow and let the more risk averse people make all the money.
Thanks, Bill
Sam – would like to get your take on If it is wise to refinance when you currently have an FHA loan ( first time buyer putting the 5% down) considering the 80% LTV on a cash out refinance. Fortunately value of my home has increased pretty nicely, but not to the greater extent to make the 80% LTV with it. Would it be wiser to wait until my equity increases through time and pay down then take advantage of the low rates now ?
Wow on yields being at all time lows. The markets are crazy right now. If I start thinking about my investment performance too much then I tend to lose focus on my long term horizon. So I try to deploy cash in times like these when I have some available and then do my best to ride out the storm.
It never occurred to me to even think about doing a cash out refi to invest in stocks. My risk tolerance is much lower than that. But I can see how it is something to contemplate if the markets took a 30+% drop like you mentioned. I still doubt I’d have the tolerance to do it though.
I agree that this makes sense from a capital preservation perspective given that your post focused on stocks in particular. But what about cashing out to invest in high yield savings accounts or bond funds? Vanguard’s long-term IG mutual fund (VWESX) pays a 2.64% dividend and has an 8%+ annualized return since 1973. Given that there are mortgages available at lower rates than the dividend, it seems like this is a no brainer to cash out and invest (not even factoring in the interest deduction for those that itemize). Even assuming a mortgage rate of 3.5%, total interest earned on VWESX (dividends only) would be greater than interest paid on the 3.5% mortgage because the interest portion of a mortgage payment becomes exponentially smaller as the loan amortizes, and interest earned on investments grows exponentially larger as you earn interest on your interest. Using the above rates as examples, you breakeven (interest earned = interest paid) after 11.5 years (assuming 30 year fixed rate and you invest all of your loan proceeds). Using your loan rate of 2.375% and a CIT high yield savings rate of 1.75%, the breakeven is 14 years. Again, I am ignoring the tax benefit in calculating the breakeven. I’m curious why you don’t refinance to invest conservatively? I understand the risk of interest rates rising if you only consider an ARM, but I think you can easily beat the 30 year rates investing in bond funds, especially if you factor in capital appreciation.
Is this what you are doing? If not, why not?
I like to build positions with cash flow. A cash-out refinance takes time and there simply are no guarantees.
Yes, I will be using this strategy. I am in a different position though as I am not retired so my investment horizon is longer-term. Also the time/costs are worth it given my current rate. I view the cash out as “free” optionality since the cost of borrowing is so low and I will be incurring the transaction costs anyway.
When you say build positions with cash flow, is that another way of saying you are trying to DCA with smaller, recurring investments? Or just that you are happy with your current allocations? Or both? Great topic, thanks for your thoughts.
I’m confused by rate quote systems online… I was using nerdwallet.com to search for the best refinance rates… and they’ve been going UP the last few weeks and less options are available. Is this just because refinancing companies are so slammed they are halting refinancing? No Fee companies like BETTER.com and REALI.com… were popping up regularly with the lowest rates… not so much anymore. I closed on my 3.29% 20 year fixed mortgage end of February. I’m content with my rate, but I went through a broker. When I locked my rate I compared it to offers on NerdWallet and it looked like a good deal at the time. Curious what deal my broker could get me now!
NerdWallet is primarily a credit card affiliate site. If you are seeing rates going up on NW, you are getting screwed. I don’t know how people can trust NerdWallet when their main business model is getting people to sign up for credit cards that have an APR of over 20% in this low rate environment.
where do you go online to shop for rates? BankRate.com were even higher… Google used to have a search for rates but they killed it.
Credible and Rocket Mortgage/Quicken are good. Then I always ask my bank to see if they can match or preferably beat.
30-year fixed is at 3.25% or lower, depending on relationship and cost.
7/1 ARM is at 2.6.25% or lower, depending on relationship and cost.
Perhaps my math is wrong, but a 2.375% mortgage in a 2.0% inflation era only equals a 0.375% cost of money for the first year. The principal amount never increases with inflation so I’ve locked in a debt at a historical amount and pay the debt in the future with inflated dollars. As an extreme example to make my point, say you got an interest-only mortgage 50 years ago. For simplicity I’ll use minimum wage as a measure of earnings. In 1970, minimum wage was $1.60 and today it’s $7.25 nationally. So I’m paying 2.375% interest on a 50 year old principal with current dollars. I have 453% purchasing power today ($7.25/$1.60) on a debt denominated in 1970 dollars. The 0.375% cost of money only applies if the principal is inflation-adjusted. Since it is not, the deal is even (way) better. With an interest-only mortgage my equity has still grown significantly since my 2020 real estate has likely appreciated near or above inflation while the mortgage is still stated in 1970 dollars; not to mention the increase in your investments from your cash-out transaction. Double-whammy!
In the process of doing this on a rental property I own. 3.25% for a 75 LTV cashout refi on a 5/1 ARM. Monthly payment will only go up by about $20 versus my current mortgage payment and property will still cashflow very well. Doing this to increase exposure to stocks. Specifically I’m buying the private mortgage insurance stocks heavily (ESNT and NMIH). My target is 50% of my invested net worth in stocks and 50% in rental real estate. Currently around 40% in stocks and 60% in rental property equity with this pullback, so this refinance should bring me close to 50%. When stocks appreciate more, I’ll buy another property! Nice to have a target percentage because it pushes you to buy more on the dips. A cashout refi is also a nice way to manage your effective return on equity of your rental properties. I target a 15% return on equity for my rentals.
Nice disciplined plan!
Who are you using?
A small community bank in my area. I’ve found their rates to be better than all the big national banks, especially for investment properties. The process is also WAYYY easier and quicker with a small bank. Took me a day to do the refinance paperwork and docs with this bank… recently refinanced another rental property with key bank and took more than 3 months of back and forth on the paperwork. Never again will I go with a big national bank.
Amerisave Mortgage Corporation has competitive rates and is easily the most convenient refinance I’ve completed out of several earlier ones. Pretty much everything is handled through a simple online portal. They were offering 75% LTV cashout refis in January 2020 and closed my deal in less than three weeks from the initial application. One interesting aspect is dialing in the preferred APR vs. closing fees. You can pick exactly what you what to bring or leave in cash at closing.