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Refinancing: How much home equity should I put into the stock market?
Old 09-15-2020, 08:57 PM   #1
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Refinancing: How much home equity should I put into the stock market?

Advice please!

We have about 10 years left on our existing 15 year mortgage at 3.25%. We're looking to refinance because, incredibly, we can probably get something in the 2.5% range. We owe about $165K on a house that's worth probably $850-$900K.

Our original plan was to get the house paid off around the time our kids are starting in college starting about 9 years from now. But with rates this low, I feel like I'd be foolish not to at least take some of that home equity and put it into some relatively conservative index fund for the next decade. Having all this money tied up in our house just seems too conservative to me.

To be clear: I'm not saying I want to take out all our home equity to start day trading penny stocks. I'm just thinking it may be prudent to take some reasonable fraction of our home equity and put it to work. I'm pretty confident that we can resist the urge to fritter away the money on home improvements and fancy cars.

When I refinance, should I stay on our current course and only borrow the $165 I still owe on the house? Maybe I should finance an additional $100K? I'd like to keep our monthly payment from getting too much higher than we're currently paying, and I probably want to stay at just a 15 year loan.

Please let me know what you think!
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Old 09-15-2020, 09:02 PM   #2
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How much home equity should I put into the stock market?
No more than you would feel comfortable seeing decline by a substantial percent and not recover for several years.
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Old 09-16-2020, 12:14 AM   #3
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You need to find your comfort level, but I’m ok with debt up to about 20% of net worth. I also have to be able to service the debt with conservative cash flow from investments if things go south.
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Old 09-16-2020, 12:19 AM   #4
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Cash out refi will be a higher rate and interest may not be tax deductible if the goes out side property improvements etc. I would still do it though.
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Old 09-16-2020, 08:54 AM   #5
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In an overbought equities market and a bond market that pays a pittance, where would you put the money where it would beat your 2.5%+ without exposing you to considerable downside risk? After all, you will be making payments on this and your interest deduction may be limited as well.

Personally, I love being debt free...it likely isn't the smartest move, but it works for me.
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Old 09-16-2020, 10:12 AM   #6
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In an overbought equities market and a bond market that pays a pittance, where would you put the money where it would beat your 2.5%+ without exposing you to considerable downside risk? After all, you will be making payments on this and your interest deduction may be limited as well.

Personally, I love being debt free...it likely isn't the smartest move, but it works for me.
My thinking is that with a 10 year time horizon, the risk is relatively low that I'll earn less than a 2.5% average annual return. I'd probably put it in some mix of moderate, broadly diversified Vanguard index funds.

I totally agree with you about being debt free -- that's why we've taken this approach thus far. But, like you, I'm increasingly recognizing that "it likely isn't the smartest move," so I'm trying to cautiously take on a little more risk for a little more return.
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Old 09-16-2020, 10:24 AM   #7
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... Please let me know what you think!
I think you need to articulate what problem you are trying to solve.

Maximize the pile? Apparently. Why? What is the purpose of the maximization strategy and is the incurred risk worth the potential payoff?

Do you already have enough? There are those who then argue that you should stop playing the game altogether.

Do you not have enough? In that case, if the gamble fails you will have less. Is that OK? Is the probability of loss acceptably low?

If you don't know where you're going, any road will get your there.
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Old 09-16-2020, 10:39 AM   #8
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It seems you are late to the party. The indexes are so heavily weighting the high fliers, I am not sure I would go in that direction.

I am like you in terms of small mortgage, large home equity. But no plans to cash out and invest more. But also I have more than enough as it is.
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Old 09-16-2020, 11:43 AM   #9
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I think you need to articulate what problem you are trying to solve.

Maximize the pile? Apparently. Why? What is the purpose of the maximization strategy and is the incurred risk worth the potential payoff?

Do you already have enough? There are those who then argue that you should stop playing the game altogether.

Do you not have enough? In that case, if the gamble fails you will have less. Is that OK? Is the probability of loss acceptably low?

If you don't know where you're going, any road will get your there.
Great advice, but if you decide to;
Do the refi, and sit on the cash. When the market crashes due to huge tax increases, and a failing economy, invest as you see fit at the time after you see stability (if any). If we get through the next 2 years without such a crash, then pay off the mortgage instead of investing in the markets. It will only cost you 2.5%/yr on the money you sat on and you get the opportunity for that premium. I would not invest in the market with borrowed money at this point.
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Old 09-16-2020, 11:52 AM   #10
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Originally Posted by TheRunningMan View Post
In an overbought equities market and a bond market that pays a pittance, where would you put the money where it would beat your 2.5%+ without exposing you to considerable downside risk? After all, you will be making payments on this and your interest deduction may be limited as well.

Personally, I love being debt free...it likely isn't the smartest move, but it works for me.
I am in general agreement with the above statement. Markets appear high in exposing house debt monies to the market.
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Old 09-16-2020, 11:56 AM   #11
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SLCT, what are the chances you lose your source(s) of income *and* don't have the savings to make the payments on the loan for a period of time?

Regardless of your decision about the risk of your investments under performing the loan rate - which I agree is small over a long enough loan term - you do have the increased risk of foreclosure. While this foreclosure risk may also be small, it is additive and something I think you should evaluate and assess as part of your decision making process.
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Old 09-16-2020, 12:27 PM   #12
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Other posters make a good point, equities are not cheap right now.

In 2009, I used a home equity loan to invest in equities, but that was when equities were beaten down. It wasn’t a large amount. I wouldn’t be as willing to do that on today’s market.

You could sit on the cash and DCA over the next year to minimize any equity drop.

As for foreclosure risk, taking out a larger mortgage now could help if you kept the money in cash, or at least part of it. If you lose your job/income, then your ability to get a new mortgage is nil and you’d have less cash to draw from. Extra cash in this case could help
get you through that period.

Lots of variables to consider.

Personally, I don’t see any harm as long as you make conservative assumptions.
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Old 09-16-2020, 12:48 PM   #13
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Originally Posted by SLC Tortfeasor View Post
We have about 10 years left on our existing 15 year mortgage at 3.25%. We're looking to refinance because, incredibly, we can probably get something in the 2.5% range. We owe about $165K...

Our original plan was to get the house paid off around the time our kids are starting in college starting about 9 years from now. But with rates this low, I feel like I'd be foolish not to at least take some of that home equity and put it into some relatively conservative index fund for the next decade. Having all this money tied up in our house just seems too conservative to me. .

When I refinance, should I stay on our current course and only borrow the $165 I still owe on the house? Maybe I should finance an additional $100K? I'd like to keep our monthly payment from getting too much higher than we're currently paying, and I probably want to stay at just a 15 year loan.

Please let me know what you think!
Are your kids' college educations fully funded? Or are you counting on having the house paid off freeing up $ to allow you to pay for the education? How stable is your job?

Imagine the possible combination of losing one's job/health problem, severe market decline lasting several years, owing more on your house, and trying to fund college, all at the same time. Do you have assets that can cover all this (aka, a back-up plan)? If not, I'd consider it too risky.
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Old 09-16-2020, 03:57 PM   #14
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OP, why not do a no cost refi and lower your current rate? Unless you are already 100% equity, then adjust your existing portfolio to take on more risk.
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Old 09-19-2020, 01:54 PM   #15
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If you are going to do a cash-back refi, why only get $100K? Go up to 75%-80% LTV. In for a penny in for a pound.

Your question really doesn't make sense to me. The idea of pulling cash out to invest is to invest in something that (long term) will have a higher return than the cost of the money you are borrowing.
If you are seriously considering this, you should get a 30 year mortgage, not 15 years.

Say you refi and pull $500,000 out. Take $100K and put that into an FDIC insured savings account and use that to suppliment the mortgage payment so that your out-of-pocket stays about the same as you are currently paying.

$165K @ 2.5% 15 yr = $1,100/mo
$665K @ 3.25% 30 yr = $2,900/mo. So you'd need to withdraw $1800/mo from the savings account. Ignoring any yield, that would last 55 months. When it gets too low, sell some of the investments to replenish it.

Invest the remaining $400K in a quality index fund. Maybe the ratio of 100/400 is too extreme for you, or pulling out $500K is uncomfortably high, but you get the idea. Pull out a serious amount of cash. Put a chunk into a SHTF savings account and invest the rest.

If you are concerned about the large weight that the S&P 500, or actually any market-weighted fund has in just the top few stocks, invest in an equal weight index. RSP (S&P 500 EW), QQQE (Nasdaq 100 EW), or EQAL (Russell 1000 Equal Weight).
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Old 09-19-2020, 02:05 PM   #16
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I've considered my home the ace-in-the-hole if or when something like CV-19 hit where I knew I had a roof over my head no matter what happened with work, income, retirement funds, SS, pensions, etc. For that reason, I've never considered putting it on the line for any amount. The primary investment strategy for my paid-off home is that of my housing cost is pretty much zero. Some fixed expenses never go away, but at least I don't worry about someone foreclosing or otherwise able to out me.
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Old 09-19-2020, 03:16 PM   #17
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It really depends on your current financial situation and your goals. If you invest the entire $100K, you'll be paying extra now for a long-term investment that may or may not payoff later. Nobody's going to guarantee more than a 2.5% return for a long time; and the extra $100K needs to start being paid back immediately since it's a loan, not a HELOC.

If you are rolling in it, and just want to play, then you can't hurt yourself too much. If you're on the bubble and can't afford to make a large financial mistake, then you should probably think harder about it. You could also just take the extra monthly payment you would otherwise be paying and use it to dollar-cost-average purchase index funds instead. That way you can save when you want, and not when you can't; and you don't owe anyone anything.

Realistically, using your low-cost equity is not a bad strategy as long as you have a well-thought-out purpose for the money and can afford the higher payment.

FWIW, right now I'm being very conservative and broadly diversified.
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