Is a cash out refi a good move for us?

[Goldy]

Loan 5/1 2.5% adjusting in May
$156,000 balance
$350,000 property value
Considering cash out refi loan $250,000 @ 2.75% & $1,800 closing costs

We are at the end of a 5/1 ARM at 2.5% so I am looking at refi options since rates are probably not going to get much lower than the are now.  I'm thinking of doing a cash out refi to pull ~100,000 out of the house and invest it in the S&P because the math just seems to work.  The worst the market has done over 30 years is around 8% and this loan would be locked in at 2.75% for 30 years plus inflation would chip away at it too.

This seems like a no brainer.  For an extra $150/mo I can have an extra 100k invested that will grow to just over $1M after 30 years compared to paying 117k in interest plus the 250k principal. 

Am I missing something obvious or is this a slam dunk?

[zolotiyeruki]

Yes, you'll want to refinance.

Whether to cash out is a personal decision, and is just another iteration of the "pay off your mortgage early vs invest" debate.  Personally, I'd probably refinance the $156k to lock in the low rate.

When I was poking around the idea of refinancing a few months ago, I noticed that I could get a lower interest rate with a $200k loan vs a $100k loan.  So even if you want to keep your mortgage balance low, you may want to consider getting a cash-out (and larger) mortgage, and then using the cash to pay the balance down to where you wanted it to start anyway.

[poetdereves]

Personally, I'd do the cash out refinance at 2.75% and take the longer time to pay off the mortgage. I think one big thing to consider is how long you want to stay in your home. If you're planning on trying to sell it in the next few years, having such low equity in the house could make getting the price you want difficult depending on what the market in your town is like. Especially if you're in the camp that thinks housing prices may dip in the next few years due to COVID. I am not necessarily in that camp, but it's something to consider.

DW and I did a low-ish interest HELOC to take out some of the equity in our house and used that cash to buy an investment property. We are at the end of some updates and then we are going to get in touch with our bank and refinance that house to turn our 100% equity into a 75% mortgage with 25% equity. We should be able to pull out all of the cash we put into purchasing and upgrading it to pay off that HELOC and repeat the process. Then, the rent we get will cover the mortgage and all future expenses and we will have $0 of our own money into the investment property. Then, we can just repeat as desired to get some extra income and have some houses that will most likely appreciate over the next decade or so.

This may not be the path for you, but having those funds at such a low interest rate can open up a lot of opportunities for you if you get creative and stay conservative.

[Gronnie]

How are the closing costs so low, are you rolling some of those into the mortgage?

[Goldy]

How are the closing costs so low, are you rolling some of those into the mortgage?

Nope.  That’s the quote and includes all 3rd party fees.  It doesn’t include escrow funding but that gets returned from my old lender anyway so I consider that a wash.

[Goldy]

Zolo, you’re right that taking the cash out actually drops the rate down a bit which surprised me. 

The only downside I could come up with was that it will increase our minimum spend so if we did fire we would need to be careful about healthcare subsidies and taxes but it’s not a huge change.  36/37 +1 with two incomes so I’m not worried about “losing the house” if markets crash.

To poets point there are some financial investments in the future that will require cash so instead of selling current stocks this may make sense.

Thanks for the comments

[HeadedWest2029]

I asked a similar question here - https://forum.mrmoneymustache.com/investor-alley/taking-out-a-new-mortgage-on-a-paid-off-house/msg2667988/

I think it makes good sense (I'm actually borrowing a little on margin in a brokerage and reinvesting elsewhere that pays more interest)

My words from the earlier post on why it might not make sense

ERN had a pretty good post in 2017 when rates were 4%, which ultimately may be the best answer based on the CAPE
"According to this table, no mortgage and an 80/20 portfolio would have done the best if targeting a failsafe withdrawal amount and all other failure probabilities up to 10%."
https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/

[Goldy]

Application submitted!  In the last day the fees decreased down to 1700 so I locked it in there