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Old 02-16-2016, 11:50 AM   #21
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Depending on your expenses, you portfolio seems to be substantial enough that you may not be as negatively impacted by falling house prices or bear markets as others might be.

Some downsides that may be worth considering in your plan:

Home value drop - get a handle on what you'd expect the worst to happen and be comfortable with it. For example, my area is dropping in value such that my house value may drop up to ~5% per year over the next few years based on historical data.

Portfolio value drop - My portfolio and income from it is set up such that I am comfortable with up to about a 40% drop in the market...which I consider possible over the next couple years. Make your own estimate of worse case and make sure you are comfortable with your plan then.

Large unexpected costs - Tough to really plan for this other than have some emergency fund available. My DW and I both had unexpected medical issues the last two years. Was good that our plan had available cash to handle them.

Best of luck with whatever you decide.
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Old 02-16-2016, 12:24 PM   #22
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My approach follows William Bernstein's advice. I invest enough in safe assets (fixed annuity, bonds) to cover my basic expenses, and invest the rest in a portfolio tilted towards equities. I considered what the OP is considering and decided I could not get a safe return that would exceed the mortgage interest rate. So I paid off my mortgage.
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Old 02-16-2016, 02:13 PM   #23
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It's a great idea.

It has always been a great way to wealth, mortgage your own house to put in the stock market. After all, the market returns 9% annually, and your interest rate is only 2.44%. That is 6%+ return, for doing nothing. Warren Buffet probably started this way. It's even easier to beat the market and make more than the 9%, if you actively trade.

Most Financial Advisers are also advocating this. Mortgage your home at retirement, put it in your investment account. Live the retirement dream on the banks money.

Worse case, the market loses your money and you are stuck with higher mortgage payments. Your retirement is delayed. Or you lose your own home. These are all inconsequential items that can be overcome when the real estate market goes even higher. And the market soars to new highs. There is no limit to wealth if you have real estate or stocks.

Let us know how it works out.
To be fair, many of us are making the same fundamental choice when we chose to invest in the market while not paying off an existing mortgage. It's a matter of degree and personal risk tolerance.

Currently, I'd rather buy a group of stocks in companies I have confidence in than pay off my 3% mortgage. Few people think I'm crazy for buying stocks while I still have a mortgage. Would it be crazy to take a small mortgage out to buy stocks if I didn't already have one?

It feels different to people, but it is fundamentally the same decision. The leverage adds risk, but we take that same risk when we buy a house with a modest down payment instead of cashing stocks out to pay cash for the house and many sensible people make that decision.
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Old 02-16-2016, 02:54 PM   #24
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"I could do a cashout refinance of the house (moving the LTV from the current 35% to 60%) and use the proceeds to invest into my 55/45 diversified portfolio."


On this website, that question is like throwing bloody meat into shark infested waters. Has April Fools come early?
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Old 02-16-2016, 06:03 PM   #25
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I did something similar just before I retired... but on a smaller scale. I refinanced, took some cash out and invested it and lowered my rate by 1% (from 4.375% to 3.375%). But in my case the mortgage was only about 10% of my retirement assets rather than 15%.

I don't see it as a big deal... you seem to know the risks and the potential benefits.
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Old 02-16-2016, 07:24 PM   #26
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I agree. It's no different than having a mortgage already and investing in the market. It's worked out for me, and I suspect over the next 5-10 years it will continue. My only concerns would be the costs and the variable interest on the new loan. I would never leverage my mortgage if it was variable. Too many chances for it to rise beyond my ability to beat the rate. I lived through the 80s and my first mortgage was 15-3/4%. Despite the current situation I believe those days could/will come again. But if you could truly pay off the mortgage without having to sell into a down market, then it could be OK. And if the cost of the refi is truly $295, then the costs are no big deal. But I've never had a closing where the costs were that low.

If you decide to go with it, good luck. I'd track the investment closely, just to be able to track how it's going vs. the interest rate. But that's me.
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Old 02-17-2016, 02:55 PM   #27
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Can I payoff my 3.375% mortgage....Absolutely. Will I....Hell No.
This!

Quote:
Yes, this is a 3/1 ARM, but I don't really care what the APR is after 3 years since I will be out of the house already.
The best laid plans oft go astray.

Last time I looked cash out refi's have more restrictions and higher fees & costs than non-cashback.

All in all, if you are talking about a 3 year timeframe it doesn't seem worth it. Just wait out the 3 years.
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Old 02-17-2016, 09:26 PM   #28
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This idea is certainly not a slam dunk. And that's why I am still weighing and thinking about it.

For those who asked about the refinance details, it is advertised by Third Federal S&L. The 3/1 ARM jumbo mortgage with regular closing costs is 1.99%. If you elect the low closing costs option ($295), the rate goes up to 2.44%.

These rates are for a cash-out refinance. I think when the LTV is below a certain threshold, there is no additional rate penalty with a cash-out.
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Old 02-18-2016, 07:37 AM   #29
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I had another thought on your relatively short time horizon. If the worst case happens, your house could lose value (can happen when interest rates are going up) and the market could be down. You'd be forced to sell assets at depressed prices to cover the lost equity when you buy another house. Note that bond values also sink when interest rates rise.

That may be the scariest part of your plan; the stars have to be aligned just right when you want to sell.
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Old 02-18-2016, 08:08 AM   #30
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The OP has won the game so this seems a very marginal possible benefit for the hassle and risk with a portfolio that size. It would be like that scene in Forrest Gump when he makes the game-winning touchdown yet keeps running hard all the way out of the stadium.


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Old 02-18-2016, 08:37 AM   #31
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I had another thought on your relatively short time horizon. If the worst case happens, your house could lose value (can happen when interest rates are going up) and the market could be down. You'd be forced to sell assets at depressed prices to cover the lost equity when you buy another house. Note that bond values also sink when interest rates rise.

That may be the scariest part of your plan; the stars have to be aligned just right when you want to sell.
Actually, as long as he is prepared to let the house go back to the bank, it may be a great investment strategy.

When a bank gives you a loan, and you give them a mortgage, you are implicitly buying a real estate call. You can sell the call, pay off the loan, and pocket any proceeds. This is a typical home sale.

Or you can let the call expire. The bank gets the house, and you walk away. You live rent free for a long time. In many states like MN, well over a year. You do not even have to pay property taxes. We mostly have foreclosures by auction (rather than judicial), so there is no recourse for the loan. Most states are like this.

The house can even be rented out during this time frame. If he plans ahead, he can buy a different house before his credit is affected, and not even worry about his credit score. In two to three years, he will be set again.

The market investment, if you invested in a diversified fund, should not decline by too much. Dividends may not even be affected.
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Old 02-18-2016, 08:53 AM   #32
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I live in California. As far as I know, a purchase mortgage is non-recourse. But a re-finance is a recourse loan so I can't just drop the keys to the bank if the home prices crash.

In the end, all this is probably just academic discussion. I think this is one of those cases where the potential benefit does not outweigh the risks by much.
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Old 02-18-2016, 09:08 AM   #33
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Actually, as long as he is prepared to let the house go back to the bank, it may be a great investment strategy.

When a bank gives you a loan, and you give them a mortgage, you are implicitly buying a real estate call. You can sell the call, pay off the loan, and pocket any proceeds. This is a typical home sale.

Or you can let the call expire. The bank gets the house, and you walk away. You live rent free for a long time. In many states like MN, well over a year. You do not even have to pay property taxes. We mostly have foreclosures by auction (rather than judicial), so there is no recourse for the loan. Most states are like this.

The house can even be rented out during this time frame. If he plans ahead, he can buy a different house before his credit is affected, and not even worry about his credit score. In two to three years, he will be set again.

The market investment, if you invested in a diversified fund, should not decline by too much. Dividends may not even be affected.
Only 13 states are non-recourse states. I want to make this clear for anyone else reading this. The vast majority of states are full-recourse for any deficiency. http://www.forecloseddreams.com/recourse_states/

Also, those states which are non-recourse have certain limitations and rules which any homeowner in those states should understand. The mortgage laws differ widely from state to state. Also, defaulting on a mortgage even in a non-recourse state could have an effect on your credit.
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Old 02-18-2016, 09:26 AM   #34
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I did a cash out refinance in 2009 and bought four rental properties at the bottom of the market, using the proceeds and additional cash. The houses cost $64-74,000 and were rented in the $850 range immediately. Of course, no one knew that was the bottom of the market then.

At the time I did this, I was prepared for a rise in prices equal to inflation and my intent was to hold the properties for a long time. By the time I got the fourth house in January of 2012, prices had already started to rise. Rents are in the low-mid $900's now, but the houses are each worth $150k.

I was also able to refinance the mortgage on my house in late 2012 for 30 years at 3.125 percent. In essence, I financed the four additional rentals on my house at at the lowest owner-occupied interest rate possible.

I took the risk because my thirty years of real estate experience convinced me that prices had stabilized, the transfer of assets from weak hands had become an orderly process, and I could make a decent return on the rentals at their purchase price. However, I also benefited from taking the sequence of returns risk. The sequence of returns worked out in my favor in this case.
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Old 02-21-2016, 06:46 PM   #35
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Bad idea. 'Nuff said.


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Old 02-21-2016, 07:25 PM   #36
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Bad idea. 'Nuff said.
Useless response. Because not 'Nuff said.
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Old 02-21-2016, 11:08 PM   #37
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There's a somewhat related discussion on the Bogleheads:

At what rate would you borrow to invest?
https://www.bogleheads.org/forum/vie...ewpost=2809999

I say "somewhat related" because my aim is different. My intent is to take out some equity from the house now to invest. I will sell the house not more than three years later.

The Boglehead discussion is more akin to taking a "permanent" loan for investment.
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Old 02-22-2016, 07:20 AM   #38
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I did it once because my interest rate was over 6% and my mortgage was too low to refinance at no closing cost so I borrowed 180K and invested 114K of it. So far so good, I refinanced again without cash out so down to 3.458% and only owe 121K now. I might pay it off with the current arm adjust in 2018 and when I sell and buy next house might pay cash or get a mortgage so it is like borrowing to invest but I don't mind having a mortgage.
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Old 02-22-2016, 12:14 PM   #39
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I get what the OP is doing. It's basically a partial early cash-out of personal real estate. For those that don't like lump sum investing, this is an alternate way of doing it in chunks, but doing the first part early by taking a loan to cash out of part of the value and investing it now, instead of waiting until the property is sold.


Seems like a reasonable plan to me. The worse case is if the real estate market tanks and you have to come up with some extra cash at closing, but it doesn't sound like you are leveraging too heavily so there doesn't seem to be much of a chance of foreclosure. And of course the stock market could also drop or stay flat, meaning that you pay more in interest than you get by investing in the stock market.


Just because you can lose money doesn't mean it's a bad idea. You just weigh that possibility against the possible gains, and decide what amount of risk you are willing to take.


You also might think about whether the extra loan is going to make you a bit more anxious and willing to take a lower offer when you do go to sell. That could negate some of the possible gains.
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Old 02-22-2016, 12:15 PM   #40
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I think a cash out refi can be a good thing depending on the situation.

In the OP's situation, I do not think it is a good idea. Given the short time frame, I think it is too much risk.

On the other hand, I am thinking about pursuing this. I purchased my condo 2 years ago and got it at a steal since it was bank owned. My condo is probably valued about 16% higher than what I paid for it, in only two years' time.

In the same two years, mortgage interest rates have slightly gone down, so, I can cash out the 16% increase (excluding 20% downpayment), pocket about $25-30K and increase my principal mortgage balance by the same amount, yet my monthly payment will go up around $100.

Given that I am 26 and have a huge time horizon, I don't see how this wouldn't be a good idea, assuming I plan to invest the proceeds from the cash out refi.
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