Is it time to refinance a paid for home?

[dm]

30 yr fixed rates are around 5% now. I'm starting to think about refinancing my paid for home and invest the money. I havn't run the numbers yet, but has anyone else started to look at this?

I believe in the long run the market will improve, and inflation will kick up again. I would invest the money fairly conservativly. Something like 30% index funds and the rest MM, Bond funds, and some RE or REITS.

My wife is still currently employed, she is 48, and doesn't plan on retireing for a few months yet. So I don't think we would have a problem getting a loan. Also our home is only around 10-15% of our net worth, so we are really not betting the farm.

 

[tryan]

Forgetting the emotional-debt-thing ... your timing couldn't be better.

 

[smileydog]

For me... I would not borrow money to invest. May look good on paper but I would not do it. If your home value is only 10-15% of your net worth I would find another way to participate in the market.

 

[bank5]

DM, would a HELOC also work? My sister's current HELOC is at a very low rate - I think under 3%.

For other people looking to refinance my advice is to call the major banks directly and if you have excellent credit make sure you get something a couple points below the national average.

I'm in the process of refinancing to lock in a lower interest rate. I spoke with a lot of brokers and did the lending tree thing but the best offer came from calling my mortgage company (Wells Fargo) directly. They offered me a no-cost, 30 year fixed (no prepayment penalty, no escrow) for 5.125%. I could have gotten ~4.5% but didn't want to pay closing costs and any points. Plus I figure if rates continue to drop, I'll just do the no-cost refi thing again and not lose anything.

 

[ziggy29]

Personally I wouldn't borrow money to invest, but if you have a long-enough time horizon, excellent cash flow and (most importantly) very secure employment (or other very secure income stream), I wouldn't oppose someone doing this if they understood the risks and could afford to lose big on the money they borrow.

 

[FANOFJESUS]

Just be careful, I think this is a bear market rally.

 

[NotReady4Purple]

Well - we're being quoted 4.5% to refinance now - and that will definitely improve our cash flow. (We don't take $ out when we refinance.)

 

[DAYDREAMER]

Borrowing on your home to invest is crazy talk. But, I am one who values the huge security blanket having my house paid off. Especially in these times, when layoffs are happening, including my job! I don't welcome being layed off, but it it happens, I am less at risk due to my security blanket.

 

[aaronc879]

I certainly wouldn't do it. It's possible it could pay off in the long run but to me it's not worth the risk. This coming from someone who invests >90% in equities.

 

[haha]

Borrowing on your home to invest is crazy talk.

Then is it also crazy for someone who has a purchase money mortgage to invest in the market? Shouldn't he also pay off his mortgage?

Or is this a state where it matters which door you use to enter?

Ha

 

[ziggy29]

Then is it also crazy for someone who has a purchase money mortgage to invest in the market? Shouldn't he also pay off his mortgage?

Or is this a state where it matters which door you use to enter?

It really is a state of mind thing. We're really talking about the equivalent question in two different directions. Dave Ramsey uses that one all the time when someone asks if they should invest a lump sum windfall or pay off the mortgage.

"I got this $100,000 lump sum. Should I invest it in the market or use it to pay off the mortgage?"

"If you owned the house free and clear, would you borrow $100,000 against it to invest in the market?"

"Of course not. No way."

"Then why would you invest $100,000 when you have the chance to pay off the mortgage with it? Either way you have either $100,000 in investments and a $100,000 mortgage, or you have a paid off house with no additional investments."
​

And yet, the mentality shifts so much for many people depending on their starting point. Many people who would never think of talking out a loan against their home equity to invest still think nothing of investing extra cash flow if they already had the mortgage. It's a pretty fascinating exercise in human nature.

 

[HornedToad10]

Personally I wouldn't do it. It's basically a similiar argument of whether you want to lump sum invest (borrowing against your home) or DCA (putting more money in each month since you have higher cash-flow due to no mortgage).

Since your home is only 10-15% of your networth, that does remove most of the risk aspect from the equation of losing the home. So then it becomes the question of: do you want to borrow now and try to beat the rate of the mortgage, or do you want to invest more money each paycheck and not worry about timing the lump sum investment.

 

[Moemg]

Several of my friends did just that and now they are ready to retire but their savings are down and they still have a mortgage . If you are young and gutsy it might be a great move .

 

[Nords]

30 yr fixed rates are around 5% now. I'm starting to think about refinancing my paid for home and invest the money. I havn't run the numbers yet, but has anyone else started to look at this?

Gosh, remember 1999 when everyone was maxing out their credit cards to buy tech stocks?

Take a look at some of the 2004-era discussions in this archive:
http://www.early-retirement.org/for...f-the-mortgage-or-invest-the-money-30644.html

I've been tracking our mortgage performance against a small-cap value ETF for over 4.5 years now, and it's currently underwater. Of course history is on your side for periods greater than 20 years, but then U.S. history has never seen two stock-market contractions so close together as these.

A couple issues you may want to confront:
- Are you staying put? The median American moves every seven years.
- Are you earning less than the mortgage rate on any other assets? It makes no sense to pay 5% on a mortgage if you have bonds or Treasuries paying less. And if you keep a lot of your portfolio in CDs then you're also paying for the privilege.
- Are you sure you want to raise your expenses now for a long-term bet that may not catch up and pay off until you're in your 70s? Or one that may not pay off at all?
- If you raise your expenses, how long can you/spouse remain unemployed? You have to pay the mortgage whether you're employed or not, and whether your investments are performing or not. And you don't want to cash out the equities to pay the mortgage if they're down 20%.

Here's another data point to consider: When we took out our mortgage in 2000 its value was about 20% of our ER equity portfolio. Then after 9/11 it was over 30% of our portfolio. Over the next seven years the mortgage ratio declined into the low teens, and over the last year it's pushed 30% again. Will that sort of ratio affect your sleep at night?

Here's a thought experiment: pretend you've done as you planned and the mortgage-approval process has gone well. (Good luck with that.) Now imagine that a weather or terrorism disaster strikes and the stock market loses 25%... and stays there for a couple years. During 2007-8 we've all learned that we can calculate the effects of that type of incident on our portfolios, but the vast majority of us were not ready for the effect on our emotions.

 

[dm]

It wasn't that long ago, many thought it was foolish to pay off a mortgage instead of leaving the money invested. Now it would seem that there would be less risk since we are in a downturn. Now I know of coarse that it could continue.

I'm thinking that I could currently get 3 or 4%, not sure how the taxes would work, probably a wash. But in a few years with inflation, interest rates would rise along with the returns on other investments. I feel that rates are not likely to remain this low for a long period of time.

If I'm wrong I still have the money and can pay the house back off. I may lose a percent or two, but not likely the whole thing. And my wife is a school administrator with 27 years in. She can retire at anytime and get a nice pension, she was going to retire last year but decided to work one more year.

I paid off my home back in 2005 and I don't regret it. Im just wondering if now might be a better time to take on a little debt.

 

[ziggy29]

And my wife is a school administrator with 27 years in. She can retire at anytime and get a nice pension, she was going to retire last year but decided to work one more year.

Ah. Well, in this economy that's like holding a winning lottery ticket. This makes it a little easier and more justifiable to assume the risk. I still don't think I'd do it even then, but this definitely does make the risk a lot more manageable.

 

[Animorph]

I asked for cash out on my mortgage refi application, so if that goes through I will invest the extra. It gives me 30 years worth of cash at 4.375% fixed rate (plus some points). If the market does worse than that over 30 years that I'll have bigger problems than this loan.

My HELOC only runs for 7 years, at which time I need to renew it. While the current rate is low, it will increase real quick when that "hyperinflation" hits. plus that 7 year period will be getting closer. I didn't like that in 2001-2005. Nonetheless, my HELOC money is in the market once again, but probably for just a few years and with a shorter term strategy suitable for short-term money.

Just one of the "crazy" people.

 

[Rambler]

We paid off our house before we did serious investing (in the stock market - we did have a few rentals for a while but didn't make anything when we sold). Once the home(s) were paid off, we started pouring into the markets. I would personally never put my home at risk in the market. But if you still have the pension income, and could live without it if it were all directed to pay the mortgage (worst case scenario) then I suppose you could...but why would you. Then again, if a worst-case scenario happened, you may lose the other 90% of your net worth that is not the house, and have nothing. Nah, I wouldn't do it...there are some things where you should "leave well enough alone"...such as your family's shelter.

FWIW,

R

 

[ERD50]

30 yr fixed rates are around 5% now. I'm starting to think about refinancing my paid for home and invest the money. I havn't run the numbers yet, but has anyone else started to look at this?

I believe in the long run the market will improve, and inflation will kick up again. I would invest the money fairly conservativly. Something like 30% index funds and the rest MM, Bond funds, and some RE or REITS.

All other pros/cons aside - does it make sense to do this if you only are comfortable with 30% in the market?

IOW, what are the odds that a portfolio with a high allocation of MM/Bonds will beat your mortgage? That is the 'bet' you are placing when you decide to invest mortgage money. A high market allocation is a risk - the market might underperform over your mortgage term. No risk, no reward. But, what are the odds that MM/Bonds will outperform a mortgage? Slim I think. So, I suspect the numbers will show that you need a fairly high market exposure for this to work on average - and if you are not comfortable with that market exposure, then you probably should not do it.

I'd look at your AA before/after and see if it fits your risk tolerance.

-ERD50

 

[frayne]

Borrowing money to invest, sounds pretty risky to me.

 

[tryan]

Seems to me the risks would be worth taking if your re-fi was lowering your rate.

You could concievably keep your payment roughly the same; have a nice hedge against inflation (via the mortgage) and increase the upside on the equity investment.

There can't be too much doubt that inflation is in our future. The feds are spending $$ like it grows on trees.

 

[DangerMouse]

I would ask myself what my motivation is to do such a thing. For example, do you have enough to FIRE without entering into this strategy or is your intention to attempt to accelerate the process? If you are just trying to add some topping to the ice cream do you really want to subject yourself to the stress. Personally if I was in a situation where I could FIRE with adequate funds and little stress that is the avenue I would take.

 

[ERD50]

Borrowing money to invest, sounds pretty risky to me.

So, as haha mentioned - are you recommending that no one should invest a penny in anything until their mortgage is paid off?

-ERD50

 

[haha]

I asked for cash out on my mortgage refi application, so if that goes through I will invest the extra. It gives me 30 years worth of cash at 4.375% fixed rate (plus some points).

This is definitely leverage on about the best terms that I have ever heard. I find it hard to come up with credible scenarios where you would lose.

Ha

 

[Koolau]

To me, the mortgage vs no mortgage is similar to other AA questions. If you look at your house as just another asset, and you feel comfortable with putting it at risk, it's little different than trading some bonds for stocks. It's a matter of what you are comfortable with. The timing for such a move seems ideal, but with all the caveats mentioned by other folks.

I think the question to answer was presented by DangerMouse. I'll add that you need to decide if you're willing to live with the consequences of your strategy not panning out. Could a failure put off a relatively "safe" retirement date? Are you willing to w*rk 2 more years? 5 more years? Could it mean that you'll be cutting dryer sheets in half instead of taking a couple of cruises a year (or whatever guilty pleasures you currently plan with your current AA)? That's the kind of trade-off I always look at. YMMV