Author Topic: Hot Market = Cash Out Refinance?  (Read 1964 times)

kudy

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Hot Market = Cash Out Refinance?
« on: June 18, 2016, 03:32:32 PM »
Of course it's your decision. To play devil's advocate, if your house were paid off, would you borrow against it to have cash in the bank?

yes i would and everyone here should.  a mortgage is a giant inflation hedge.  having a mortgage in FIRE is a giant safety net vs not having one. 

This exchange in another thread prodded me to think about something that's been in the back of my mind for a while... A lot of folks around here would never pay off a low interest mortgage early, and many people cite the more promising returns in the market as a reason to maximize leverage with cheap loans, so... is it a good idea to do a cash out refinance, given that the real estate market around me is going bananas right now, and the value of my home on paper has skyrocketed?

I currently owe ~$103K on a 30 year fixed at 3.5%.

Based on recent sales of identical houses in the neighborhood, I think the house would easily appraise between $190,000 and $200,000. Assuming a 75% loan-to-value, I could potentially refinance and get ~$38-46K of equity out of the house in cash. It looks like I could also secure the same rate I have now.

I don't have any particular job picked out for the extra money, but I could invest it, either by buying another property, or buying funds.

Has anyone done something similar? Besides paying fees to refinance, what are downsides to a move like this?

mozar

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Re: Hot Market = Cash Out Refinance?
« Reply #1 on: June 18, 2016, 03:59:41 PM »
Seems like a hassle to  me. If your area is high in demand, why not get a roommate?

BlueHouse

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Re: Hot Market = Cash Out Refinance?
« Reply #2 on: June 18, 2016, 04:54:49 PM »
Of course it's your decision. To play devil's advocate, if your house were paid off, would you borrow against it to have cash in the bank?

yes i would and everyone here should.  a mortgage is a giant inflation hedge.  having a mortgage in FIRE is a giant safety net vs not having one. 

This exchange in another thread prodded me to think about something that's been in the back of my mind for a while... A lot of folks around here would never pay off a low interest mortgage early, and many people cite the more promising returns in the market as a reason to maximize leverage with cheap loans, so... is it a good idea to do a cash out refinance, given that the real estate market around me is going bananas right now, and the value of my home on paper has skyrocketed?

I currently owe ~$103K on a 30 year fixed at 3.5%.

Based on recent sales of identical houses in the neighborhood, I think the house would easily appraise between $190,000 and $200,000. Assuming a 75% loan-to-value, I could potentially refinance and get ~$38-46K of equity out of the house in cash. It looks like I could also secure the same rate I have now.

I don't have any particular job picked out for the extra money, but I could invest it, either by buying another property, or buying funds.

Has anyone done something similar? Besides paying fees to refinance, what are downsides to a move like this?
Many people did exactly this prior to 2008.  Then the market dropped, Real Estate prices fell, jobs were lost, and millions had to liquidate their investment accounts (including 401k) to pay their mortgages.  They couldn't sell their houses because the house was now valued at less than the loan amount.  Many lost homes and retirement funds. 

If you want to take this approach, I would make sure that your job is very stable or you have enough cash to continue making payments without having to liquidate investments that might be worth a fraction of what they were when you decided to leverage. 

hodor

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Re: Hot Market = Cash Out Refinance?
« Reply #3 on: June 18, 2016, 07:10:27 PM »
Has anyone done something similar? Besides paying fees to refinance, what are downsides to a move like this?

Yes, I have and will do so in the future.

Hopefully it is clear there are risks in doing so such as, but not limited to, interest rates rising and your investment could fall in value.

You need to carefully consider your situation, goals and stability. For myself by refinancing a loan and obtaining a lower rate my repayments on the higher amount were actually lower, plus income was increased by the dividends.

kudy

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Re: Hot Market = Cash Out Refinance?
« Reply #4 on: June 19, 2016, 08:58:32 AM »
Seems like a hassle to  me. If your area is high in demand, why not get a roommate?

Thanks for the suggestion - I have 2 roommates, my SO, and another person in the spare room. Doing the refinance isn't too big of a hassle, but I guess I should probably have a clear vision for what exactly to do with the money if I'm going to do it.

Yes, I have and will do so in the future.

Hopefully it is clear there are risks in doing so such as, but not limited to, interest rates rising and your investment could fall in value.

You need to carefully consider your situation, goals and stability. For myself by refinancing a loan and obtaining a lower rate my repayments on the higher amount were actually lower, plus income was increased by the dividends.

Certainly! I see the risks clearly, and I'm fairly confident in the stability of my situation to be able to handle any downsides.

bacchi

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Re: Hot Market = Cash Out Refinance?
« Reply #5 on: June 19, 2016, 09:28:53 AM »
Of course it's your decision. To play devil's advocate, if your house were paid off, would you borrow against it to have cash in the bank?

yes i would and everyone here should.  a mortgage is a giant inflation hedge.  having a mortgage in FIRE is a giant safety net vs not having one. 

This exchange in another thread prodded me to think about something that's been in the back of my mind for a while... A lot of folks around here would never pay off a low interest mortgage early, and many people cite the more promising returns in the market as a reason to maximize leverage with cheap loans, so... is it a good idea to do a cash out refinance, given that the real estate market around me is going bananas right now, and the value of my home on paper has skyrocketed?

I currently owe ~$103K on a 30 year fixed at 3.5%.

Based on recent sales of identical houses in the neighborhood, I think the house would easily appraise between $190,000 and $200,000. Assuming a 75% loan-to-value, I could potentially refinance and get ~$38-46K of equity out of the house in cash. It looks like I could also secure the same rate I have now.

I don't have any particular job picked out for the extra money, but I could invest it, either by buying another property, or buying funds.

Has anyone done something similar? Besides paying fees to refinance, what are downsides to a move like this?
Many people did exactly this prior to 2008.  Then the market dropped, Real Estate prices fell, jobs were lost, and millions had to liquidate their investment accounts (including 401k) to pay their mortgages.  They couldn't sell their houses because the house was now valued at less than the loan amount.  Many lost homes and retirement funds. 

If you want to take this approach, I would make sure that your job is very stable or you have enough cash to continue making payments without having to liquidate investments that might be worth a fraction of what they were when you decided to leverage.

The payment on $103k at 3.5% is $463. The payment on $140k at 3.75% is $649. If the ~$35k cash-out is given a 50% haircut, there would still be 94 months left to pay the difference between the original payment and the cash out payment ($17.5k/$186). If the $17,500 was instead used for the full payment, there would be over 2 years of payments available.

It seems that, if you're worried about job loss and not being able to make the payment for an extended time, taking a cash-out refi is the wiser choice.

Dicey

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Re: Hot Market = Cash Out Refinance?
« Reply #6 on: June 19, 2016, 10:31:56 AM »
I am generally a strong, vocal advocate of filling all available retirement and investment options before prepaying a cheap, fixed rate mortgage. I am not against pulling money out for other investment purposes. I believe that a low interest mortgage is a great hedge against inflation and a powerful tool for building wealth.  However, my perspective is forever warped by the fact that I live in a very high COLA.

Given your comparatively tiny numbers (not snarking, just the facts), I would let the mortgage ride and look for other ways to boost your savings/investments. You could, for example, decide to make the full mortgage payment out of your own income and invest 100% of the roommate income. That would probably get you "there" even faster, with significantly lower risk. And even "free" re-fi's aren't without costs.