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Old 02-22-2016, 01:34 PM   #41
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I'm in the camp of keeping my home debt free so I can sleep better at night. We paid it off six years ago and have lived a debt free life except for some short term car loans (to take advantage of their discount offers) ever since. We are in the process of buying and ocean front condo in Florida and are using cash for that. We also keep a few years of living expenses in CDs or online savings accounts to ride out any severe market downturns, but we do keep enough in the market to benefit from any gains and dividends. I just can't stand the thought of putting my home at risk.


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Old 02-22-2016, 02:11 PM   #42
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We're assessing a different flavor of this issue now in deciding whether to pay cash for a winter condo or finance. I'm leaning towards financing since I think I can beat the 3-4% that I would be paying and the loan would only be ~5% of our retirement assets so if the whole thing went sideways it would not ruin us.
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Old 02-22-2016, 02:38 PM   #43
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This question would be easier for me to answer if the PE10 wasn't on the order of 50% above the median. But let's say, for argument's sake, we can ignore that and we can expect historical gains in equities.

I'd change the plan a bit. I'd still do the cash-out refi, but instead of an ARM, I'd get a 30 year, locked-in at a current market (historically low) interest rate. In 2 or 3 years, when I move, I'd call a company and hire them to manage renting the house. Then, when interest rates rise (there's nowhere to go but up), you're paying back the mortgage with cheap future inflated dollars. The competition (apartment complexes) will raise rates as inflation happens, so you'll raise your rent, while your mortgage payment stays the same. I think the mentality that debt is always wrong is misguided; debt can be an effective part of a financial plan.
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Old 02-22-2016, 03:04 PM   #44
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Originally Posted by younginvestor2013 View Post
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.
What's the risk? He's paying for a premature cash out, something he says he's be doing in a couple of years anyway. Pay a small fee, get some equity out of the home (selling high and locking in some profits, in other words), decrease your mortgage rate, thereby probably making up most or all of the cost of the refi, then complete the sell process in a few years. As Running Man says, just because you can lose money doesn't make it a bad idea.

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I just can't stand the thought of putting my home at risk.
How would the OP be putting his home at risk, if he's going to sell before the interest rate can be raised? If worse came to worse and he decided not to sell in a few years, he could always refinance into a 30 year fixed, even if the rates have gone up a tad.

As far as those (including me previously) that are recommending a 30 year fixed, I doubt he could get that great closing cost or rate deal. In the OP's situation I'd have to seriously consider his plan. Good upside, minimal downside. If he follows through on the sale. And if he actually invests the money. If he turns around and spends it, then that's no better than what all the other idiots did in the previous housing bubble.
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Old 02-22-2016, 03:22 PM   #45
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What's the risk? He's paying for a premature cash out, something he says he's be doing in a couple of years anyway. Pay a small fee, get some equity out of the home (selling high and locking in some profits, in other words), decrease your mortgage rate, thereby probably making up most or all of the cost of the refi, then complete the sell process in a few years. As Running Man says, just because you can lose money doesn't make it a bad idea.



How would the OP be putting his home at risk, if he's going to sell before the interest rate can be raised? If worse came to worse and he decided not to sell in a few years, he could always refinance into a 30 year fixed, even if the rates have gone up a tad.

As far as those (including me previously) that are recommending a 30 year fixed, I doubt he could get that great closing cost or rate deal. In the OP's situation I'd have to seriously consider his plan. Good upside, minimal downside. If he follows through on the sale. And if he actually invests the money. If he turns around and spends it, then that's no better than what all the other idiots did in the previous housing bubble.
Things are always great until they're not. Possibilities with the craziness in this world of government manipulation of the financial markets are unpredictable. Credit liquidity could cause another real estate market crash, so when he wants to sell, he may find his home of much less value that it is now. The stock markets...well, no one can predict what happens there if there is another credit crisis or government regulations or taxes strangle business and the stock market sinks to what some of the doomsayers predict. Deflation could ravage the global economies with a variety of impacts.
Rent doesn't always go up because there isn't always inflation. My rental property has stayed pretty level for the last 15 years because of an increased number of rentals available as people try to keep from losing their homes and rent it out, or developers are building to meet the demand. Fortunately we have no mortgage on our rental either.
My point is I don't want to leverage my home to invest in a higher risk market. The way local and state governments already increase property taxes to pay for state/local pensions is turning property taxes into mortgage-like payments.
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Old 02-23-2016, 03:06 AM   #46
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Refinancing for a lower rate is generally worth it. But, then deciding to invest it all in the market in one big lump sum, is basically market timing, and allocating towards a very aggressive portfolio.

Sometimes, having a more aggressive portfolio, is exactly the right choice. For example, not being near retirement, and right after a long recession, is an ideal time to do something like this.

However, neither of those factors are present at all, so instead of just being risky, it is extremely risky. It is buying high, at a time when the need for portfolio stability is at its highest. Further, the time horizon is extremely short, generally for such a short investment period, stocks would not be recommended by almost any financial adviser (that is actually looking out for you). So, in this situation, it is a very bad idea to do anything beyond refinancing for a lower rate.
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Old 02-23-2016, 10:15 AM   #47
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My point is I don't want to leverage my home to invest in a higher risk market. The way local and state governments already increase property taxes to pay for state/local pensions is turning property taxes into mortgage-like payments.
This is just the old "mortgage/no mortgage" religious debate, and not worth getting into here. The OP seems to be pretty firmly on the mortgage side.

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However, neither of those factors are present at all, so instead of just being risky, it is extremely risky. It is buying high, at a time when the need for portfolio stability is at its highest. Further, the time horizon is extremely short, generally for such a short investment period, stocks would not be recommended by almost any financial adviser (that is actually looking out for you). So, in this situation, it is a very bad idea to do anything beyond refinancing for a lower rate.
My impression was that the OP was looking to refi some cash out, lower his interest rate, and lump sum into his existing AA. Since the general advice on this board is to lump sum into the market, and since he didn't (as far as I saw) say anything about pulling the money back out of the market after a few years, I don't see where you are getting the risky part. Where's the short term horizon coming from? Personally, I don't think this is the greatest market to invest into, but if you could see my investing history you would know not to take my timing advice. But in this case, it's just getting money out of equity ahead of time and putting it into his ongoing AA while lowering his mortgage rate. No particular risk visible, IMO. If I'm missing something, let me know.
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Old 02-23-2016, 10:25 AM   #48
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My impression was that the OP was looking to refi some cash out, lower his interest rate, and lump sum into his existing AA. Since the general advice on this board is to lump sum into the market, and since he didn't (as far as I saw) say anything about pulling the money back out of the market after a few years, I don't see where you are getting the risky part. Where's the short term horizon coming from? Personally, I don't think this is the greatest market to invest into, but if you could see my investing history you would know not to take my timing advice. But in this case, it's just getting money out of equity ahead of time and putting it into his ongoing AA while lowering his mortgage rate. No particular risk visible, IMO. If I'm missing something, let me know.
You understood my intentions well. I have close to $1m in home equity in my current home. I intent to move to a LCOL area in 1 ~ 3 years. Of this $1m in home equity, 500k will go into buying the next home; the other $500k will be invested into my AA (55/45).

Now, instead of lump summing the $500k investment in the future, I am thinking to take out part of the equity and investing into my AA now, thereby spreading out the investment in time. I also get to lower the mortgage interest rate in the meantime.

If housing prices drop a lot (*see below) within the next 1 ~ 3 years, I might have to draw from other money sources if I want to fully pay up the house in the LCOL area. Otherwise, I might obtain a small mortgage. It all depends on the rates at that time. My portfolio value is currently $3.5m so I feel I will have adequate buffer.

* Note: If suppose I take out $250k in equity to invest now. Then the remaining home equity would be $750k. The house value would have to drop by 250k/1.5m = 17% before eating into the $500k equity earmarked for the house in the LCOL.
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