Cashout refinance to invest?

[catotx]

I plan to ER and move out of my HCOL house in a few more years (probably not more than three). When I was looking at the recent low mortgage interest rates today, an idea came to my mind. I could do a cashout refinance of the house (moving the LTV from the current 35% to 60%) and use the proceeds to invest into my 55/45 diversified portfolio.

The loan I am looking at is a cashout 3/1 ARM loan at 2.44%. The refinance cost is $295 (all in, including appraisal, title etc). This will also lower the interest rate of my current 2.625% 15-yr fixed mortgage.

The effect of this is that I am taking the money (before the move) and putting it into my portfolio earlier.

One risk I can think of is that if property prices drop by more than 40%, it could affect my ability to sell the house and move. But I could always top up with cash to payoff the loan.

I would appreciate any comments. Thanks.

 

[Senator]

It's a great idea.

It has always been a great way to wealth, mortgage your own house to put in the stock market. After all, the market returns 9% annually, and your interest rate is only 2.44%. That is 6%+ return, for doing nothing. Warren Buffet probably started this way. It's even easier to beat the market and make more than the 9%, if you actively trade.

Most Financial Advisers are also advocating this. Mortgage your home at retirement, put it in your investment account. Live the retirement dream on the banks money.

Worse case, the market loses your money and you are stuck with higher mortgage payments. Your retirement is delayed. Or you lose your own home. These are all inconsequential items that can be overcome when the real estate market goes even higher. And the market soars to new highs. There is no limit to wealth if you have real estate or stocks.

Let us know how it works out.

 

[athena53]

Just in case Senator's sarcasm didn't get through- bad idea, except for the "financial advisors" who collect commissions on all the investments you buy. I noticed that the loan you're looking at is adjustable, too. What will the interest rate be when that sweet teaser rate disappears?

 

[Senator]

Just in case Senator's sarcasm didn't get through- bad idea, except for the "financial advisors" who collect commissions on all the investments you buy. I noticed that the loan you're looking at is adjustable, too. What will the interest rate be when that sweet teaser rate disappears?

Sarcasm? I almost forgot that he can get a 2x - 3x leveraged ETF (SICK, CLAW and CURE) and and get 18%+ or 27%+ return. After all, the market will never go down for long.

 

[ripper1]

Worked out well for me. The only difference was I used the proceeds directly after a sale of my home in 2011 to put to work in market. The rest was used as a 20% down payment on new home in retirement.

 

[Whisper66]

One of the joys of retirement is much lower stress levels. One way to help that is to simplify investments and remove risks. Being debt free is quite a nice situation to be in, simplifies your life and removes stress. Remortgaging your house and reinvesting for higher returns might make you some money. But imagine if we move into an extended bear market. Your new investments may be losing money and your mortgage is still having to be paid on a house that may have dropped in value significantly. Your payout on this move might be years away or maybe not in your lifetime. My personal feeling is that's not a situation I prefer to be in. So we have no mortgage and no outstanding debt. What money we have left over has been invested but conservatively enough to avoid stress. Your temperament and risk aversion may be quite different than mine so I understand going down a different path. But really think through the worst case scenarios and make sure the potential benefits are really worth the risks to you.

 

[ripper1]

One of the joys of retirement is much lower stress levels. One way to help that is to simplify investments and remove risks. Being debt free is quite a nice situation to be in, simplifies your life and removes stress. Remortgaging your house and reinvesting for higher returns might make you some money. But imagine if we move into an extended bear market. Your new investments may be losing money and your mortgage is still having to be paid on a house that may have dropped in value significantly. Your payout on this move might be years away or maybe not in your lifetime. My personal feeling is that's not a situation I prefer to be in. So we have no mortgage and no outstanding debt. What money we have left over has been invested but conservatively enough to avoid stress. Your temperament and risk aversion may be quite different than mine so I understand going down a different path. But really think through the worst case scenarios and make sure the potential benefits are really worth the risks to you.

To each his own and own situation. To me having a paid off house means I have too much real estate as part of a diversified portfolio. Can I payoff my 3.375% mortgage....Absolutely. Will I....Hell No.

 

[catotx]

Thanks for all your different viewpoints. I have been characterized as a trader or trying to beat the market. This is not true. My portfolio is mostly indexed with an overall expense ratio of about 0.3%.

I don't try to beat the market, I know what it is to be disciplined and I don't sell off when the market dropped. I have been through 2001, 2003, 2008/9 and each time, I re-balanced back to my target portfolio.

The main change with the move I am thinking is that this will spread out my investments. Instead of a lump sum investment when I eventually sell the house in one or two years, I am putting part of it to the portfolio first. When I sell the house, there will be no additional debt.

Yes, this is a 3/1 ARM, but I don't really care what the APR is after 3 years since I will be out of the house already.

 

[ExFlyBoy5]

For me (and that should be the BIG takeaway here), living in a home that is paid for is something that truly helps me sleep better at night. Sure, I could write a check today for $50,000'ish (I do have a HELOC for $ flow issues if there is something VERY catastrophic that might happen) and have it invested before the end of the day. And it's quite possible that I would come out ahead *if* the market did well. BUT...for ME, I don't like that risk and I would always know that the title to my home would be clouded. And I don't like that. And thus, won't do it. That isn't to say that it isn't a good idea...it's a very personal choice.

 

[REWahoo]

If you weren't planning to retire for 10 or more years, this would make more sense (to me), but with only a 3 year time horizon I'd be concerned about a possible double-whammy: a significant drop in housing values combined with a corresponding drop in the market. This close to retirement is the time I'd be thinking about playing defense, not becoming more aggressive in my investment risk.

 

[ExFlyBoy5]

I'd be concerned about a possible double-whammy: a significant drop in housing values combined with a corresponding drop in the market.

And that tends to happen at the same time. R/E has cooled quite a bit here in the Atlanta area. This isn't to say that we are in a bubble, or that it's going to be another 2009, but I would be cautious and I personally wouldn't be looking to tie up anymore $ in real estate.

 

[athena53]

Worked out well for me. The only difference was I used the proceeds directly after a sale of my home in 2011 to put to work in market. The rest was used as a 20% down payment on new home in retirement.

Somehow, that seems different to me- not sure why. DH and I did that when we moved from a very HCOL area to a LCOL area; put 20% down on the new house and plowed the rest into investments in 2003. Even now, in retirement, we're carrying a small mortgage ($100K) at 3% fixed because over the long run I believe we'll do better keeping $100K of assets in the market. Somehow, though, a cash-out refi seems more aggressive. Maybe it's just how you look at it. The OP's time horizon is pretty short, too, which makes it riskier.

 

[W2R]

This close to retirement is the time I'd be thinking about playing defense, not becoming more aggressive in my investment risk.

+1

Personally I guess I moved into my (more conservative) retirement asset allocation about three years before I retired. This was to make sure before I retired that everything was in place, and producing more or less the kind of yield I had in mind, and not in any greater risk than I would want to endure after my salary stopped appearing via direct deposit every two weeks.

 

[ExFlyBoy5]

+1

Personally I guess I moved into my (more conservative) retirement asset allocation about three years before I retired. This was to make sure before I retired that everything was in place, and producing more or less the kind of yield I had in mind, and not in any greater risk than I would want to endure after my salary stopped appearing via direct deposit every two weeks.

The more and more I think about it, I am beginning to think that the folks at VG are smarter than me and thus I should shift pretty much EVERYTHING into VWELX. I do a small amount of trading, but my returns just aren't really worth the pain of all the research. I have held off on this since I am so young, but it seems like it's a much easier approach and will accomplish what I need to accomplish.

 

[ripper1]

If you weren't planning to retire for 10 or more years, this would make more sense (to me), but with only a 3 year time horizon I'd be concerned about a possible double-whammy: a significant drop in housing values combined with a corresponding drop in the market. This close to retirement is the time I'd be thinking about playing defense, not becoming more aggressive in my investment risk.

Well, like I said everyone is different and I think I can be a little more aggressive in my investment risk in retirement because pension and wife's ss pays for our living expenses and only debt being our mortgage. That being said our portfolio which is 50/50 should probably be more aggressive also.

 

[REWahoo]

The more and more I think about it, I am beginning to think that the folks at VG are smarter than me and thus I should shift pretty much EVERYTHING into VWELX. I do a small amount of trading, but my returns just aren't really worth the pain of all the research.

+1

I came to a similar conclusion many years ago.

 

[REWahoo]

Well, like I said everyone is different and I think I can be a little more aggressive in my investment risk in retirement because pension and wife's ss pays for our living expenses...

In that case, put it all on black...

 

[unclemick]

It's a great idea.

It has always been a great way to wealth, mortgage your own house to put in the stock market. After all, the market returns 9% annually, and your interest rate is only 2.44%. That is 6%+ return, for doing nothing. Warren Buffet probably started this way. It's even easier to beat the market and make more than the 9%, if you actively trade.

Most Financial Advisers are also advocating this. Mortgage your home at retirement, put it in your investment account. Live the retirement dream on the banks money.

Worse case, the market loses your money and you are stuck with higher mortgage payments. Your retirement is delayed. Or you lose your own home. These are all inconsequential items that can be overcome when the real estate market goes even higher. And the market soars to new highs. There is no limit to wealth if you have real estate or stocks.

Let us know how it works out.

Well let me tol ya. Post Katrina I bought a house (1000 miles inland on a hill) with 20% down 5.75% and after 10 years it's got a pending sale at 60% of the purchase price AND my portfolio returned 5.42% over those past 10 years.



heh heh heh - But the Saint's finally won a Superbowl and I got married at age 70. All things considered a win win.

 

[ripper1]

In that case, put it all on black...

K

 

[catotx]

Let me put out some numbers. The portfolio is now $3.4m (down from $3.6m at the beginning of the year).

Here's my original plan. Sell my current house in one or two years for $1.5m. Of this money, roughly 1/3 will go to payoff the mortgage, 1/3 will be used to buy the house in a LCOL area and another 1/3 will be added to the portfolio.

My current idea: take out about $300k in equity from the house to invest now. When I sell the house, the difference will be that instead of adding $500k to the portfolio, I will only be adding $200k. If housing prices drop, I probably will have less to add to the portfolio.

In the meantime, the mortgage interest rate will be lowered from 2.625% to 2.44%. The $300k will be invested, and obviously subject to market risks.

 

[Whisper66]

Depending on your expenses, you portfolio seems to be substantial enough that you may not be as negatively impacted by falling house prices or bear markets as others might be.

Some downsides that may be worth considering in your plan:

Home value drop - get a handle on what you'd expect the worst to happen and be comfortable with it. For example, my area is dropping in value such that my house value may drop up to ~5% per year over the next few years based on historical data.

Portfolio value drop - My portfolio and income from it is set up such that I am comfortable with up to about a 40% drop in the market...which I consider possible over the next couple years. Make your own estimate of worse case and make sure you are comfortable with your plan then.

Large unexpected costs - Tough to really plan for this other than have some emergency fund available. My DW and I both had unexpected medical issues the last two years. Was good that our plan had available cash to handle them.

Best of luck with whatever you decide.

 

[MikeTN]

My approach follows William Bernstein's advice. I invest enough in safe assets (fixed annuity, bonds) to cover my basic expenses, and invest the rest in a portfolio tilted towards equities. I considered what the OP is considering and decided I could not get a safe return that would exceed the mortgage interest rate. So I paid off my mortgage.

 

[Hamlet]

It's a great idea.

It has always been a great way to wealth, mortgage your own house to put in the stock market. After all, the market returns 9% annually, and your interest rate is only 2.44%. That is 6%+ return, for doing nothing. Warren Buffet probably started this way. It's even easier to beat the market and make more than the 9%, if you actively trade.

Most Financial Advisers are also advocating this. Mortgage your home at retirement, put it in your investment account. Live the retirement dream on the banks money.

Worse case, the market loses your money and you are stuck with higher mortgage payments. Your retirement is delayed. Or you lose your own home. These are all inconsequential items that can be overcome when the real estate market goes even higher. And the market soars to new highs. There is no limit to wealth if you have real estate or stocks.

Let us know how it works out.

To be fair, many of us are making the same fundamental choice when we chose to invest in the market while not paying off an existing mortgage. It's a matter of degree and personal risk tolerance.

Currently, I'd rather buy a group of stocks in companies I have confidence in than pay off my 3% mortgage. Few people think I'm crazy for buying stocks while I still have a mortgage. Would it be crazy to take a small mortgage out to buy stocks if I didn't already have one?

It feels different to people, but it is fundamentally the same decision. The leverage adds risk, but we take that same risk when we buy a house with a modest down payment instead of cashing stocks out to pay cash for the house and many sensible people make that decision.

 

[Newventurer]

"I could do a cashout refinance of the house (moving the LTV from the current 35% to 60%) and use the proceeds to invest into my 55/45 diversified portfolio."


On this website, that question is like throwing bloody meat into shark infested waters. Has April Fools come early?

 

[pb4uski]

I did something similar just before I retired... but on a smaller scale. I refinanced, took some cash out and invested it and lowered my rate by 1% (from 4.375% to 3.375%). But in my case the mortgage was only about 10% of my retirement assets rather than 15%.

I don't see it as a big deal... you seem to know the risks and the potential benefits.