Cash out home mortgage to possibly invest?

[fire53]

With the current mortgage interest at a record low. I am thinking about cash-out 500K+ of our paid-off home at ~2.5% interest rate for 15 yr term.

The cash will be on hold for an opportunity to invest (either in the equity market, rental RE, or industrial building...) not sure which one will take a hit first, as I see both the stock market and RE where I live is at an all-time high.



We plan to semi-retire in the next 3 years and I may not qualify for this type of loan in the future when I am no longer employed. And my thinking is investment return should beat the 2.5% interest rate.



We currently have ~1.7M in pre-tax accounts stock/bond/cash. Over 2M in RE rentals net equity, and ~500K in cash saving accounts.



If the market or RE won't crash/correct in the next 3-5 years, I just simply paid off the mortgage again.



What do you think?



Thank you for your time.

 

[VanWinkle]

With the current mortgage interest at a record low. I am thinking about cash-out 500K+ of our paid-off home at ~2.5% interest rate for 15 yr term.

The cash will be on hold for an opportunity to invest (either in the equity market, rental RE, or industrial building...) not sure which one will take a hit first, as I see both the stock market and RE where I live is at an all-time high.



We plan to semi-retire in the next 3 years and I may not qualify for this type of loan in the future when I am no longer employed. And my thinking is investment return should beat the 2.5% interest rate.



We currently have ~1.7M in pre-tax accounts stock/bond/cash. Over 2M in RE rentals net equity, and ~500K in cash saving accounts.



If the market or RE won't crash/correct in the next 3-5 years, I just simply paid off the mortgage again.



What do you think?



Thank you for your time.

Let's see- borrow money to invest in a market at fresh highs.....
This type of exuberance is usually a sign of impending doom.
I think it is a gamble you don't need to take.
What will you invest in while waiting for the market to decline, and will
it cover the 2.5% you're spending to borrow the money?

I'm in the "don't do it" camp.

VW

 

[bloom2708]

"should beat the 2.5%".

Should, not will.

I would hard pass.

 

[SonofCohoes]

Maybe, not in rentals though, I’m not sure where that’s headed. But to have money to buy a big dip, that sounds good.

 

[pb4uski]

Well, history would suggest that would be a smart play in that there are probably few 15 year periods where the things that you intend to invest in would return less than the 2.5% that you are paying for the money.... however, investing near all-time highs doesn't make sense to me... I have a lot of money sitting off to the side right now waiting to see if equity valuations ever come down to earth so you might be waiting a while.

I am similarly positioned... financially comfortable with two paid off homes that I could mortgage at a very low interet rate and use the proceeds to invest... but why? I have no need to and I don't need the money as I already have all that I need (though I concede that more is better). Cash out refi to invest is not even on the radar screen for me.

 

[Jerry1]

I think if I was buying a house and I already had money invested, I would consider a mortgage instead of pulling money out of my investments. Rates are low and if inflation spikes, you’ll win by paying back in devalued dollars.

So, if I’m willing to do that, why not take money out of my existing house it invest it? Because the decision is not the same. Taking money out of my investments incurs a cost. Most of my money is in tax deferred accounts, so I’m going to have to pay a large chunk of taxes on a large withdrawal. In other words, withdrawing significant amounts from my portfolio minimize my ability to manage my net income for things like tax planning and other thresholds.

In the other direction, as has been mentioned. There’s certainly no guarantee on what the market will do and there are costs associated with refinancing a mortgage (closing costs).

I wouldn’t say not to do it, but certainly need to factor in the extra risk you’d be taking on. If your portfolio is currently less than 100% stocks, I’d probably just adjust my asset allocation to recognize my additional risk tolerance.

 

[38Chevy454]

Smells like market timing to me. Unless your crystal ball is better than most, it seems a risky adventure. Investing at record high levels, both equity and real estate seems like a bad idea. If there is a correction, sure having some cash available is great. But when? What will be your cost to hold that cash for the period waiting to put it to use?


Given your other current savings and investments, I think you are fine to just stay where you are at. You have great numbers and seemingly great shape for retirement. The plan you propose seems like an extra risk you do not need. It will only pad the nestegg more, but is that really needed?

 

[kjpliny]

If you look at market performance over the past decade and expect it to continue, I would suggest that you first consider the reasons for the past performance. Have the markets ripped higher based on fundamentals?

Did one time corporate tax cuts have an effect on stock prices?
How about corporate buybacks? Are corporate earnings rising or are they stagnant?
Did artificially low interest rates for a decade have an impact?
Trillions in government and corporate bond buying by the Fed?
How strong are company balance sheets?
How many people are really unemployed, including those no longer counted by BLS?
Can deficit spending to prop up an economy last forever without a cost?
How much leverage and speculation is happening in markets right now?
Are asset values high or low compared to historical averages?

It seems as if our economy is on life support. Sounds like a gamble to me.

 

[fire53]

Thank you all for the responses.

Let's see- borrow money to invest in a market at fresh highs.....

What will you invest in while waiting for the market to decline, and will
it cover the 2.5% you're spending to borrow the money?

VW

My current thoughts are to put them in Saving/CD getting ~1%, the income tax deduction will also recover some amount....may not be equal to 2.5% but the lost would be small.

If market or RE crash/drop in the next 3-5 years, I have the cash and ready to jump in...if not just pay off the mortgage again.

 

[EarlyFIRE]

Thank you all for the responses.



My current thoughts are to put them in Saving/CD getting ~1%, the income tax deduction will also recover some amount....may not be equal to 2.5% but the lost would be small.

If market or RE crash/drop in the next 3-5 years, I have the cash and ready to jump in...if not just pay off the mortgage again.

Makes sense, and it's great that you are in a position to do that. Limited downside, tremendous upside if the market does drop.

 

[jldavid47]

What do you think?

Don't do it. This has nothing to do with whether the market(s) you want to invest in will go up or down. I have no idea and neither do you. By doing so you are exposing yourself to huge tail risk. Do you want to expose yourself to the risk that both your house and your investment could go down sharply simultaneously? If that happens, you will find yourself owing more on your mortgage than your house is worth and not having the value of the investment being able to cover it. Maybe the probability is small, but it ain't zero. Think in terms of managing risk. If you do this you are getting greedy and in markets pigs get slaughtered.

 

[The Cosmic Avenger]

I think if I was buying a house and I already had money invested, I would consider a mortgage instead of pulling money out of my investments. Rates are low and if inflation spikes, you’ll win by paying back in devalued dollars.

So, if I’m willing to do that, why not take money out of my existing house it invest it? Because the decision is not the same. Taking money out of my investments incurs a cost. Most of my money is in tax deferred accounts, so I’m going to have to pay a large chunk of taxes on a large withdrawal. In other words, withdrawing significant amounts from my portfolio minimize my ability to manage my net income for things like tax planning and other thresholds.

In the other direction, as has been mentioned. There’s certainly no guarantee on what the market will do and there are costs associated with refinancing a mortgage (closing costs).

I wouldn’t say not to do it, but certainly need to factor in the extra risk you’d be taking on. If your portfolio is currently less than 100% stocks, I’d probably just adjust my asset allocation to recognize my additional risk tolerance.

Thanks for asking this, fire53, and thanks to Jerry1 for the answer that sums up what I felt I knew but couldn't quite pin down.

 

[tulak]

The only hesitation I’d have are the high equity valuations. Otherwise, I’d be fine taking out a mortgage as long as it doesn’t create cashflow issues. A rough guide for me is a max of 20% of investible assets. I’d also consider a 30 year mortgage if there isn’t a big difference in rate.

With the current market, I’d probably DCA into an allocation over time.

 

[Bamaman]

We have to paid for homes that we could borrow against. But i don't want the hassle of active investing and thinking about the markets.

We're okay for the long run, and I prefer to keep my money in FIDO's best funds and not worry about it. I do look at the ROE and performance charts from time to time however.

 

[ERD50]

Well, history would suggest that would be a smart play in that there are probably few 15 year periods where the things that you intend to invest in would return less than the 2.5% that you are paying for the money.... however, investing near all-time highs doesn't make sense to me... .

Yes, but those 15 year historical periods included the ones where the market was at a high as well. I'm not sure of the 15 year, but IIRC the historical 20 and 30 year periods have always been positive, and a high % were significantly better than 2.5% compounded (maybe one down year for the 20 year?).

I feel it is a reasonable bet to take, as you seem well aware of the up/down side. That said, $500K is maybe pushing it, but that depends on a lot of other factors. I might feel more comfortable at a little lower of the % of net worth, JMO.

-ERD50

 

[fire53]

If you look at market performance over the past decade and expect it to continue, I would suggest that you first consider the reasons for the past performance. Have the markets ripped higher based on fundamentals?

Did one time corporate tax cuts have an effect on stock prices?
How about corporate buybacks? Are corporate earnings rising or are they stagnant?
Did artificially low interest rates for a decade have an impact?
Trillions in government and corporate bond buying by the Fed?
How strong are company balance sheets?
How many people are really unemployed, including those no longer counted by BLS?
Can deficit spending to prop up an economy last forever without a cost?
How much leverage and speculation is happening in markets right now?
Are asset values high or low compared to historical averages?

It seems as if our economy is on life support. Sounds like a gamble to me.

Agreed, and the market is probably due for a crash/correction...just no one knows when. That is why I am considering taking this calculated risk/gamble while I am still employed and qualified for the loan. Especially I think in my lifetime, I probably won't be able to borrow money much lower than the current interest rate.

 

[Dawg52]

No way I would but most do the opposite of me. So go for it.

 

[Out-to-Lunch]

Agreed, and the market is probably due for a crash/correction...just no one knows when. That is why I am considering taking this calculated risk/gamble while I am still employed and qualified for the loan. Especially I think in my lifetime, I probably won't be able to borrow money much lower than the current interest rate.

How about a compromise? How about lining up a HELOC, then pulling from it to invest if you think that some assets become "a bargain"?

The other thing I will mention that, I think, suggests sitting on your hands. You are predicating this decision partially on the historically low interest rates. However, if the market tanks, it seems unlikely that interest rates will rise from here.

 

[1242Vintage]

Three years ago we took out a $160k HELOC to take care of expected bumpy university costs for our youngest daughter.

The HELOC required us to draw the entire amount for three months. We did and parked it in a Money Market to offset the loan interest. We paid off our HELOC balance at the end of the three month draw period.

A couple months later and apparently as a result of the mortgage meltdown experience in 2008, my finance pal and I both received nasty grams from the SEC saying it wasn’t wise to extract home equity for securities investment purposes.

Don’t know how the SEC connected the dots, but they did and now there’s a letter somewhere in my “permanent file”. Dang!

Just sharing my experience and 2 cents.

 

[CardsFan]

Every time the issue of paying of the mortgage arises, my first question is always "If the house was paid off would take out a loan to invest?"

Apparently OP is in favor of "yes". And it MIGHT turn out to be a good idea, or it might not.

Not my monkey, not my circus.

Just happy to not have a mortgage. And considering home value is 5% of NW, just not worth considering.

 

[gcgang]

... current thoughts are to put them in Saving/CD getting ~1%, the income tax deduction will also recover some amount....

I don’t think you legally get a deduction on the mortgage if the cash out is not used for the real estate.

But, if making 5%+ on this money over 15 years is going to make a significant difference in your lifestyle, and that is very important to you, go for it.

 

[Finance Dave]

I thought we recently had a thread like this. I said NO on that one, and I'll say it again. NO!

 

[tulak]

I don’t think you legally get a deduction on the mortgage if the cash out is not used for the real estate.

Interesting. If I'm reading the IRS publication on home mortgage interest deduction correctly, the mortgage has to be home acquisition debt: "Mortgage treated as used to buy, build, or substantially improve home."

If you paid cash for your home you can get a mortgage within 90 days and it will qualify. Otherwise, you have to substantially improve the home with the mortgage proceeds.

Something to keep in mind if you're in the market to buy a new home and are thinking of getting a mortgage or paying cash. I know in my case, I save a good amount of money by being able to deduct mortgage interest. I would be bummed if I wouldn't have this option if I had a mortgage.

Just happy to not have a mortgage. And considering home value is 5% of NW, just not worth considering.

If your home is only worth 5% of NW, then carrying a mortgage would be trivial.

If you have a 500k house and you take out 20%, that's a 100k mortgage.

For a 15 year mortgage at 2.5%, you'll pay $667/month and a total mortgage cost of $120k. Using Firecalc's average, 100k in 15 years grows to $244k. Gain = 124k.

For a 30 year mortgage at 3.0%, you'll pay $422/month and a total mortgage cost of $152k. Using Firecalc's average, 100k in 30 years grows to $514k. Gain = 362k.

Not bad either way, but for the extra mortgage cost of $32k between a 30 vs 15 year, I'd go with the 30 year.

 

[ATXFIRE2034]

I tolerate risk pretty well and I wouldn’t do this. Especially being so close to RE. My two cents.

 

[Finance Dave]

If your home is only worth 5% of NW, then carrying a mortgage would be trivial.

If you have a 500k house and you take out 20%, that's a 100k mortgage.

For a 15 year mortgage at 2.5%, you'll pay $667/month and a total mortgage cost of $120k. Using Firecalc's average, 100k in 15 years grows to $244k. Gain = 124k.

For a 30 year mortgage at 3.0%, you'll pay $422/month and a total mortgage cost of $152k. Using Firecalc's average, 100k in 30 years grows to $514k. Gain = 362k.

Not bad either way, but for the extra mortgage cost of $32k between a 30 vs 15 year, I'd go with the 30 year.

You are completely ignoring risk. Firecalc assumes future performance will mirror past performance.