Is it time to refinance a paid for home?

[ChrisC]

There's a lot of basic financial "tools" one can use when looking at whether you should treat your home as an investment bank, arbitraging interest rate spreads or investing in other opportunities. The gravity of the risk and the probability of harm should be balanced against the "gain" one can have on the upside, when you turn your home into an investment house.

One can agree that being house rich and cash poor is not an enviable position to be in as well, but on balance there are many more things you have to consider (emotional as well as financial) which might tip the scale of being "stuck" with an illiquid asset (which can be monetized by a reverse mortgage after 62 and beyond) and not making a better return on your home. Indeed, taking into account creditor-debtor protection for jointly owned residential property by spouses, and favorable estate and Medicaid-long term health care planning -- the balance might actually tip in favor of having the illiquid asset of a house rather than leveraging it into better returns (and even safer ones too) from investments.

 

[Rockfish]

I've been thinking about doing this myself, although circumstances are slightly different I think effect is the same. We are selling a more expensive house and can -- if we want -- use equity to buy new house outright. Nevertheless, I have been wondering whether it would be good to finance some part of the new place in hope/expectation that interest rates will rise during next 30 years and low-risk investment opportunities (eg Munis) will be available that will pay more than the mortgage rate. Add to this, the tax benefits from the mortgage and a 5% mortgage rate will cost me more like 4% net. After lots of thought, I am leaning against it though, because cost of carrying loan will add up until inflation takes hold again and it will undoubtedly take time to make up that ground. I could certainly understand someone doing this, but don't think it will be me.

If you are ready to invest in something with higher risk/return immediately, it seems to me that another way to look at this is that the cost of the loan will subtract from your net rate of return. That is, if expected rate of return is 10% and cost of loan is 4%, then your net expected upside is 6%. But the risk commensurate with a 10% ROR remains. Let me know if you think there is a better way to look at it, though.

 

[kcowan]

I think the safest place to be these days is debt-free.

 

[dshibb]

eeeehhhhhhhhhhh wrong. Fixed debt is awesome as interest rates rise(as they soon will be) and devalue your debt. The answer to the OP is a most definite yes. Take the money and put it in reward checking at 5% and arbitrage the difference. Don't put refi cash out money in a riskable investment(such as equities), but there are plenty of places that will pay out more than mortgage interest minus deduction and dont carry any or much risk. And even if today you were taking a minor loss between the investment and the mortgage interest that will not last long at all and when interest rates do rise again you will see some very beautiful profits on the spread.

 

[kumquat]

How will you like your debt (at any interest rate) if we should fall into deflation? IMHO, the best time to leverage your home, to raise cash to invest, is NEVER. YMMV.

 

[wolfbay]

I'm thinking about it also.Prudent ,out of debt people like us have become a rarity in this society.The vast majority want inflation big time.With the fed printing & treasury racking up huge debt ,sooner or later they'll get what they want.Then holding a 30yr mortgage at 4-5% will put a smile on your face.

 

[P.S.]

I also like the idea of having the cash on hand instead of locked up in the house.

I need to run the numbers and talk with the bank before I chose. More than likely I will put it off and rates will rise before I pull the trigger.

I am really supprized that others arn't looking into this.

we're thinking of this. In our 30's, paid off home. We are moving (to an area that we both love), and will rent for the next year. If a good buy comes up, then we'll buy. Meanwhile, with the primary residence, thinking of parking the money taken out in someplace "safe" and just waiting for the double digit interest rates.

 

[dshibb]

Lets just establish the fact that large scale deflation shouldn't be a concern right now. First of all, in order experience more deflation either the fed has to raise rates significantly or the market has to experience another huge crash/crisis on top of our current one. The latter is economic armageddon and everybody is pretty much screwed anyway. The former isn't any big secret, large increases in the fed funds rate are visible to all, and so all you would have to do is take the money and pay off the mortgage (because you should have it in something that is both liquid and no/low risk).

Lets just say that when other people have lots of debt, you don't want any. And when everybody wants to be debt free that is when you want lots of it. And right now everybody is absolutely petrified of debt.