Author Topic: Cash out refi & invest the cash?  (Read 1097 times)

Swamp Chomp

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Cash out refi & invest the cash?
« on: June 27, 2019, 06:37:31 PM »
Speaking with a bank about refinancing our ~$141,000, 30-year loan at 4.99% that we just started last September for a 3.99% loan.  The two options are keep the same size loan and reduce our payment by $115/month at which point we would just invest that $115/month in VTSAX versus doing a cash-out refinance for $175,000 at 3.99%, keeping the same monthly payment we have now and winding up with $25,000 in our pockets for the cash out, which we would put into index fund investing.  I ran it by my CPA and feel like he may have overcomplicated it... maybe because accounting is a bit different from investing... So I came to see what some of you thought.

Grateful for any input/advice/opinions.

Kem

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Re: Cash out refi & invest the cash?
« Reply #1 on: June 27, 2019, 07:22:35 PM »
If you believe that the index fund (I prefer VTI ETF) will return greater than 3.99% over the next X years and you do not plan on moving out and selling soon - then the play is in your favour.

Even if the return is the same (after any dividend taxation), then having the liquid access to cash is of greater value locked up in a mortgage.

I am refinancing my 78% ltv 22 year remaining fixed at the same percente to a 30 year fixed as I have $2,400 cash returned and a $210/m cash flow increase.   If I had more equity in the home I'd stretch it back up to 80% for this.

Swamp Chomp

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Re: Cash out refi & invest the cash?
« Reply #2 on: June 27, 2019, 07:44:46 PM »
We have no plans of moving anytime soon.  And yes, comfortable long-term investing for long-term returns.

... And what about taking out an additional $34,000 to access $25,000 up front?  Something about that feels funny.

Kem

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Re: Cash out refi & invest the cash?
« Reply #3 on: June 27, 2019, 07:53:55 PM »
Paying 9k in lender fees to take out 25k?  Ick.  I'd shop around a bit with other lenders.

I have my 2 down to New American Financial and Agora Lending after looking at a handful.

August26th

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Re: Cash out refi & invest the cash?
« Reply #4 on: June 28, 2019, 01:00:26 PM »
Typically, interest rates for a rate/term (“regular”) refinance are lower than a refinance where you take cash out. So the fact that they’re quoting you exactly the same rate for both is odd. It makes me wonder if you are being charged significant discount points to keep the rate at 3.99% while taking cash out.

At a basic level, you’re asking about dollar cost averaging the $115 per month, vs putting the 25K into the market in one lump sum. Seems like the wisdom of the forum would say to do the lump sum all at once, so you get the benefit of time in the market.

But definitely check the interest rate, because 9K in total fees on a 175K loan is astronomical. Do you live in a state with high property taxes? Some of that could be setting up a new escrow account, but something still seems off.

charis

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Re: Cash out refi & invest the cash?
« Reply #5 on: June 28, 2019, 01:34:11 PM »
I wanted to do similar, 25K cash out 30-year refi on our current 20-year 4% loan.  A quote from our current lender, BOA, was over 4.35% and 6K+ in fees.  It seems like a cash-out refi is mainly for people who need the money/roll their debt.

Kem

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Re: Cash out refi & invest the cash?
« Reply #6 on: June 28, 2019, 06:09:33 PM »
What about a second mortgage from another lender, rather than a refi - pay off current mortgage and pull extra cash back.  Feasible? Legal?

August26th

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Re: Cash out refi & invest the cash?
« Reply #7 on: July 01, 2019, 02:16:46 PM »
What about a second mortgage from another lender, rather than a refi - pay off current mortgage and pull extra cash back.  Feasible? Legal?

Perfectly legal and feasible... but this too is a refinance. You simply replace the current lien with a new one that has a higher loan balance than the current one, and pocket the difference.

Dicey

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Re: Cash out refi & invest the cash?
« Reply #8 on: July 06, 2019, 12:47:48 AM »
Second mortgages typically cost more than firsts, so that's out. I'm good with the idea, but the fees are too high and you should be able to get a lower rate. Try asking your lender if they will do a streamline re-fi with cash out. Otherwise, shop around. There's been some conversation on this topic over on the "Don't pay off your mortgage" thread recently. Just skim through the last three or four pages.

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/1550/