Refinance primary residence with cash out?

[ajones05]

I have a question to which I can't seem to find the answer on MMM or elsewhere online... I've been a reader for a long time, but finally registered for the forum to ask:

My wife and I bought a condo for $341k about three years ago. The estimated value based on nearby comps is around $600k today.

So that's great!... but what's the best way to put the equity to work? Right now we have a 30yr fixed @ 4.125%. The outstanding loan is a little over $250k.

Does it make sense to refi with cash out and invest the money? For example, we could go to a 15yr @ 3.5% with $75k cash out.

Are there certain circumstances in which that's more advisable? I understand if I don't plan on using all or much of it right away, then a HELOC might make more sense, but what about investing -- either in something with higher returns or to buy another house and rent our current home? Alternatively, I've been working on a side-project that I've been considering growing into a real business... for which I could also use the cash. What are the pros/cons in each case and are there better alternatives?

Thank you!!!!
Andrew

[forummm]

If it were me, I would think about selling it and moving somewhere a lot cheaper. Whether it's renting or owning, you could really cash in on the extra value by saving it forever. Let someone else pay you interest on that money instead of the other way around.

[Mirwen]

Holy guacamole, Batman!  Cash that out by selling and move now.  Rent or move to another city.

[ajones05]

Thanks for the replies!!

Unfortunately, if we sell, there are not many reasonable options to stay in the area (and we do want to stay in the area).

Is there a way to use the equity to buy something else and rent our current place? We could probably get $4k/mo for it (way more than total monthly payments) and based on location it is likely to remain a very ideal rental property...

And/or does it really make the most sense to sell? And if so, without being able to buy anything else without ending up in a less favorable situation, does it really make sense to rent? I do see that it would free up cash to invest... but don't we get taxed big time if we don't reinvest in another home? And that also means we're losing the value from paying off a mortgage instead of paying someone else...

[Mirwen]

Are you in the US?  If so then you have an exemption from profit on the sale of your primary residence.  $250k for single or $500k for a married couple.  So even if single you would not pay tax on most of the profit from the sale.  The primary reason I recommend selling is that historically real estate rises with inflation.  Nearly doubling in three years sounds like a bubble about to burst.  Cashing out while keeping the place could very likely make you underwater in this scenario.  If you sell, then that profit yours to keep, even if the market changes.  Be very wary of counting on your paper profit, the only way to be certain of a gain in this scenario is to actually sell.

However if you are certain that you are staying here long term and similar places do rent for $4k then not selling may make more sense.  Just understand that what the current price is doesn't apply unless you are actually selling. But I wouldn't cash out unless you have a very definite business plan for that money.  I wouldn't cash out to simply invest in the stock market.  If you just need flexibility getting a HELOC and not drawing on it unless needed would make more sense.

[ShoulderThingThatGoesUp]

You could certainly use a HELOC to buy rental properties, but with that price run-up I imagine rentals around you aren't great deals right now.

[MDM]

Refinance to a lower interest rate?  Great plan, especially if you have identified a use for the cash out.

One caveat: check your liability under the Alternative Minimum Tax.  E.g., see https://clsheldon.wordpress.com/2012/03/13/refinancing-your-home-beware-the-amt/.

[ajones05]

OK, so with rates at either 3.0 or 3.125% depending on financing charges, it seems like it's cheap money to take cash out as we refinance, even if we were to do nothing more than invest it in Lending Club.

Does this seem crazy? I'm wondering why more people don't do that and if we're missing some obvious reason not to... even considering liability under AMT, don't the returns outweigh the cost?

[forummm]

OK, so with rates at either 3.0 or 3.125% depending on financing charges, it seems like it's cheap money to take cash out as we refinance, even if we were to do nothing more than invest it in Lending Club.

Does this seem crazy? I'm wondering why more people don't do that and if we're missing some obvious reason not to... even considering liability under AMT, don't the returns outweigh the cost?

You're taking money out of your house and hoping that people with low credit scores who can't get loans from banks will pay you back? What happens if there's a recession and those people lose their jobs or get cut backs in hours at work? There's a reason the interest rates are higher--there's a lot of default even in a good economy with low unemployment (i.e. now and the past few years). If things go south, so will your Lending Club money.

[NoraLenderbee]

OK, so with rates at either 3.0 or 3.125% depending on financing charges, it seems like it's cheap money to take cash out as we refinance, even if we were to do nothing more than invest it in Lending Club.

Does this seem crazy? I'm wondering why more people don't do that and if we're missing some obvious reason not to... even considering liability under AMT, don't the returns outweigh the cost?

You're taking money out of your house and hoping that people with low credit scores who can't get loans from banks will pay you back? What happens if there's a recession and those people lose their jobs or get cut backs in hours at work? There's a reason the interest rates are higher--there's a lot of default even in a good economy with low unemployment (i.e. now and the past few years). If things go south, so will your Lending Club money.

+2. That is exactly what happened at Prosper, the peer-to-peer lending company that preceded Lending Club (and is still around). When the economy crashed, defaults went way up. Many lenders were burned badly. There was one fellow who took out a HELOC and invested hundreds of thousands in Prosper . . . and lost most of it. P2P lending can be fun and rewarding, but it is high risk.

[frugaliknowit]

I would not borrow the equity.  That is too risky.  Borrow money against your house at 4%ish, that's crazy!!  Work toward being debt free.

If you want to move to a smaller place or rent, go ahead and sell.

[dess1313]

Right now we have a 30yr fixed @ 4.125%. The outstanding loan is a little over $250k.

rough calculator shows you paying $186k in interest over the life of this loan

15yr @ 3.5% with $75k cash out.

Why not just refinance and get the lower rate and term?  Shorter term means less interest paid, and better rate again means less interest paid.  If you did $250k at 15 years and 3.5% you'd only pay $72k in interest.  That's less than half.  I don't like paying interest to banks any more than i need to.  And your current value is based on the market.  The market goes up, the market goes down.  If you do a HELOC what if we see another housing bubble ruin your value?  AND the value of what you're considering buying?  You may not be able to sell it for the amount that is owed on it.  Just look back at what happened 7 years ago.

What if you finish your mortgage 15 years sooner and would have to consider you'd have your entire mortgage to then invest for 15 years.  Probably could get a good return on it.  $1800ish a month?  x 15 years at even a small interest rate would be a nice return.  at only just 3% you'd get back over 400k in value instead of current plan of right now only just finishing it.