All-in Balance Sheet Allocation

[recursion49]

Just wanted to get some thoughts from this forum as to how I should allocate my family's balance sheet.

We're currently worth about $250k, split between $150k of mutual funds/cash and $100k of home equity, or about 60%/40%. We contribute about $15k annually to our savings and are paying off the remaining $220k home loan at an interest rate of 4%.

My question is whether I should reduce my home equity (perhaps through a cash-out refi) and reallocate that to my mutual funds instead. I recognize that there's a bunch of fees, but I figure I could take out up to $40k (moving the split to 75%/25% between my home and investment equity). That would put more money to work at a higher rate of return than as home equity, net of fees as long as market returns are favorable.

Is that worth the risk, or should I retain my favorable levels of home equity? I'm currently 30 years old, so I think there's some level of risk that I'm willing to take if doing so makes sense...

 

[VanWinkle]

Borrowing from your home to invest is the same as taking out a Margin loan to invest, although it may have a better interest rate. I would never do that!!
Keep your investing and your house separate- one is a home, the other is an investment. You should pay more attention to the mix of stocks to fixed income vs mutual funds to house equity.
Keep up the yearly investments and pay down the house as you go.

VW

 

[RunningBum]

If you can get a favorable rate on the refi, and keep 20% in equity so you don't have to pay PMI, that wouldn't be a bad idea.

It's an ongoing debate here, whether to pay off the mortgage or to leave that money invested and keep the mortgage. You're just asking about a little more extreme version of the latter, to max out the leverage on your home with a larger mortgage. I would only do it if I could also get a lower rate on the mortgage, and not pay PMI.

 

[Senator]

I would take your mutual funds and make sure that they are 100% invested in equities, like the S&P, before I would use my home's equity.

And make sure they are low cost funds, like the ETF IVV.

A home equity (HELOC) is better than a cash out refi. Lower cost, and no origination fees.

 

[RunningBum]

HELOC rates are usually variable rate, aren't they? I would rather lock in at a fixed rate while they seem to be very attractive now. However, a HELOC would allow you to stay perpetually leveraged, if that's what you really want. Make a mortgage payment, and turn around and withdraw the equity part you just made. I probably wouldn't do it, but it's an option.

 

[pb4uski]

Your home is a place that you live in.... not an investment.

If I was refinancing to get a lower interest rate I might consider taking cash out... but more for an emergency fund/liquidity rather than for investment. Given the economic uncertainty I wouldn't increase your equities other than normal course (the $15k you are currently saving... keep doing that).

 

[Bir48die]

No

 

[OldShooter]

Your home is a place that you live in.... not an investment. ...

(Emphasis mine)

 

[tulak]

I did it on my old house and made money. I did a cash out refi for a 30 year fixed with a lower rate. Equity valuations were also lower.

Not sure I’d do it with current valuations. If we get a reasonable correction, then it’s not a bad idea.

 

[jazz4cash]

If you can get a favorable rate on the refi, and keep 20% in equity so you don't have to pay PMI, that wouldn't be a bad idea.

It's an ongoing debate here, whether to pay off the mortgage or to leave that money invested and keep the mortgage. You're just asking about a little more extreme version of the latter, to max out the leverage on your home with a larger mortgage. I would only do it if I could also get a lower rate on the mortgage, and not pay PMI.

This is a far cry from the pay off the mortgage vs leave the funds invested debate. It’s a much more extreme to convert home equity to stock assets. Very few on this board even include home equity in their asset allocation and some don’t even track net worth.

 

[RunningBum]

This is a far cry from the pay off the mortgage vs leave the funds invested debate. It’s a much more extreme to convert home equity to stock assets.

If someone has the means to pay off their mortgage, but chooses to keep the money invested instead (as many here do), guess what? They have some of their home equity invested in stock assets. It's not that different.

 

[HI Bill]

J...should reduce my home equity (perhaps through a cash-out refi) and reallocate that to my mutual funds instead. I recognize that there's a bunch of fees, but I figure I could take out up to $40k (moving the split to 75%/25% between my home and investment equity). That would put more money to work at a higher rate of return than as home equity, net of fees as long as market returns are favorable.

Is that worth the risk, or should I retain my favorable levels of home equity? I'm currently 30 years old, so I think there's some level of risk that I'm willing to take if doing so makes sense...

You can't live in your equities, but you can in your home. I would never refinance to take $ out and invest them in the markets, especially, today. During the sub-prime lending crisis, lots of people used their homes as ATMs...and when their property values fell, couldn't afford to keep them. That said, what level of risk are your comfortable with? It looks to me like you're looking to speed up your returns, which may or may not work, depending on market returns. If you keep your $ in your house, at least you have a place to live.

 

[RunningBum]

I think part of the issue is the way this was presented. If the OP had said, I'm 30 yo, have a 4% mortgage, $220K left on a $320K house, with so many years left on it, I'm thinking to refinance to a lower rate. Oh, and by the way, I'm thinking to make my new mortgage 80% of my house value. That way I have another $46K to invest. (I think I got the numbers right)

That sounds a little less like "I'm going to steal my home equity to gamble in the stock market" that people seem to be reacting to. No more talk of including equity in his AA, which really isn't necessary.

I probably wouldn't do it at this stage of the market either, but it doesn't seem totally crazy to me.

 

[VanWinkle]

I think part of the issue is the way this was presented. If the OP had said, I'm 30 yo, have a 4% mortgage, $220K left on a $320K house, with so many years left on it, I'm thinking to refinance to a lower rate. Oh, and by the way, I'm thinking to make my new mortgage 80% of my house value. That way I have another $46K to invest. (I think I got the numbers right)

That sounds a little less like "I'm going to steal my home equity to gamble in the stock market" that people seem to be reacting to. No more talk of including equity in his AA, which really isn't necessary.

I probably wouldn't do it at this stage of the market either, but it doesn't seem totally crazy to me.

At 30 years old, there are plenty of good years to compound returns on his 15000 per year investment. It does seem totally crazy to me, but then I think slow and steady wins for most people.

 

[CardsFan]

If someone has the means to pay off their mortgage, but chooses to keep the money invested instead (as many here do), guess what? They have some of their home equity invested in stock assets. It's not that different.

I agree with you, though there could be some tax consequences to paying off early (tIRA withdrawal, CG taxes). But we have several here who have bought a new home, financed some portion of that, and intend to carry it in to retirement. Just a choice. But how is it different than a cash out refi?

Personally, I would not do either one. But that's just me.

 

[Golden sunsets]

A year from now, after you have made this change and your investments and your investments are down $40,000 or more and your mortgage is $40,000 higher, how will you feel?

 

[tulak]

A year from now, after you have made this change and your investments and your investments are down $40,000 or more and your mortgage is $40,000 higher, how will you feel?

So he lost his entire 40k?

That seems unlikely. Odds are he’ll be down 30-40% max, which leaves him 24k. Not the end of the world. And odds are even better that he’ll be up, especially over a longer time-frame.

 

[Montecfo]

I would not increase my mortgage to buy securities. Not only are you making a leveraged bet on equities after a very long bull run but the interest is no longer deductible on such loans.

 

[Golden sunsets]

So he lost his entire 40k?

That seems unlikely. Odds are he’ll be down 30-40% max, which leaves him 24k. Not the end of the world. And odds are even better that he’ll be up, especially over a longer time-frame.

OK;. So would you be willing to borrow money today, regardless of the type of collateral, to invest in the market in this investment climate?

 

[tulak]

OK;. So would you be willing to borrow money today, regardless of the type of collateral, to invest in the market in this investment climate?

Probably not today, which is what I said earlier, but only because I feel valuations are high.

I have done what OP is proposing many years ago and I’d consider doing it again if it makes sense.

Leverage is a great tool when used wisely, especially when you are young. Just make sure to understand your cash flow for when markets/economies go sideways.

 

[PatrickA5]

Back in 2000, I had several friends that took out loans against their houses to day trade. Everybody was making big money day trading at the time. They tried to talk me into it, but I knew DW would kill me. One friend lost a ton in the market and then added about 10 additional years to pay off his mortgage.

 

[VanWinkle]

From Peter Lazaroff:

"Make contributions to your company’s retirement plan up to the level at which your employer matches.

Pay down debts with high interest rates relative to your expected return on investing that are not tax deductible.

Make the maximum contributions to investment accounts that are tax-advantaged such as a 401(k) and IRA.

Pay down debt in which you are paying private mortgage insurance.

Pay down debt with high interest rates relative to your expected return on investing and is tax deductible.

Make investments in accounts with no tax benefits that are expected to earn returns greater than the interest rate on remaining outstanding debt.

Pay down debt with reasonable interest rates (3% – 4%) and that is tax-deductible."

 

[mrfeh]

Borrowing from your home to invest is the same as taking out a Margin loan to invest, although it may have a better interest rate. I would never do that!!
Keep your investing and your house separate- one is a home, the other is an investment.

+1

OP - I suggest you start here: https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

 

[pb4uski]

While I wouldn't do cash out refinance solely to raise money to invest, if I was refinancing for lower rate or other reasons and could take out some cash and invest it I might do it.... especially if I had job security, my mortgage was affordable and if it went sideways it would not be financial ruin.

That said, given the short term prospects for equities I'm not sure if I would do it right now.

 

[CRLLS]

I am in the "home is a place to live" camp. However, home ownership is an investment in your future. It limits your housing rate of inflation, making future housing costs less percent of your total expenses. A cash-out refi is an immediate step up on that part of your expenses. I would continue to maximize your investing as you are doing. Without any other info, I would favor finding more ways to LBYM and invest that money into the market in a dollar-cost-averaging manner, especially in this market.