Cash out refinance for liquidity???

[csciora]

I'm debating whether a cash out refinance solely for liquidity makes sense or not.

Most of the discussions tend to be about cash out refi vs. HELOC with proceeds going toward things like home renovation, repairs, etc. Our home is a fine shape (aside from needing roofing in 1-3 years) and we have no immediate need for the cash. However, our liquid assets are relatively low and I'm intrigued by the idea of converting an effectively 100% illiquid asset into something more flexible for unknown future needs. If it were possible, I'd happily sell a pro rata share of the future house sale in return for cash today.

This isn't about playing house arbitrage. It's about taking advantage of a situation that is available today and might not exist in five years. Money is cheap at the moment. HELOC is possibly a cheaper option, but it tends toward variable rate products which I dislike. Many of the HELOC products also require zeroing out the loan balance in a much shorter timeframe than 15 years. That's not necessarily a bad thing.

There's about $250K in equity along with a 15 year fixed 2.75% mortgage. No PMI.

What are the pros & cons of pulling out $100K in cash and parking it somewhere for additional personal liquidity?

 

PROS

- cash in hand regardless of future swings in housing prices and/or credit availability

- higher returns investing cash in the markets vs. future increase in home equity (which isn't impacted either way by the mortgage)

- no tax implications

 

CONS

- $3,500 in closing fees

- higher APR on entire loan balance (pretty likely)

- higher monthly payment to cover the larger mortgage

- paperwork

 

Any other thoughts that would have an impact? Or other ways of accomplishing the goal of trading equity for liquidity?

 

Thanks!

[StarTrekDoc]

What's your endgame for the cash?   If only for a Emergency Fund, it doesn't make much sense.  This is the challenge of living in a HCOL house rich situation.  Sure, it counts to the net worth, but it's a relatively locked in unless you want to take out the equity and play with it.

We don't pay down our mortgage and keep 600k on it with an equal taxable account that's highly conservative.  This allows some leverage of the house and use to stay ahead of the dollars -- but it's just a little ahead and very conservative on it since the mortgage at risk

[Donnie]

More information could be helpful (other savings, net worth, income level, stability of job, use of borrowings (emergency fund?), etc.). Based on the OP, I see no reason to do what you propose. Just get a HELOC. I could run the numbers at some point, but the way I understand it, you want to borrow money that you have no current use for to hedge against future interest rates increasing or home values declining if you need to borrow money in the future. You are paying a hefty cost in current interest payments for that hedge.

[Zaphod]

Agree with the above. No plan means highly likelihood this money just ends up missing over time.

[jfoxcpacfp]

I agree with @Donnie - a HELOC sounds much more apropos for what you describe. Lower cost to set one up, too.

[hightower]

I did a cash out refinance to consolidate some high interest student loans a couple of years ago.  We also did a refinance for home renovations in the past as well. Turned out to be a good move for me since our home has appreciated quite a bit since then and we still have a relatively small mortgage. But, I don't think I'd do it just for the sake of liquidity or to invest.

[q-school]

I’m not sure why cash out now is attractive. Are you anticipating a market corrections and want to be liquid?

The older docs I know uniformly tell me the relief of having no mortgage and no debt is profound and hard to describe.

I’ve resisted the urge because I wanted the tax benefit and
money was cheap, but at this point I’m contemplating retiring the mortgage.

Ymmv

[csciora]

The idea started from recent threads about house-rich, cash poor seniors and the growing popularity of reverse mortgages. Understanding that owning a 100% paid off home could leave you in a precarious financial situation during retirement was new to me. It's already pretty late in the game by the time you quality for a reverse mortgage, so cashing out equity earlier came to mind.

[csciora]

Donnie wrote:

More information could be helpful (other savings, net worth, income level, stability of job, use of borrowings (emergency fund?), etc.). Based on the OP, I see no reason to do what you propose. Just get a HELOC. I could run the numbers at some point, but the way I understand it, you want to borrow money that you have no current use for to hedge against future interest rates increasing or home values declining if you need to borrow money in the future. You are paying a hefty cost in current interest payments for that hedge.

Click to expand...

Yes, it's absolutely a hedge.

Surprisingly, hefty costs weren't the case based on the projections I ran. Picture the simplest case of investment returns matching the loan rate. The HELOC is definitely a better choice since only the cash out portion is subject to the higher rates. But even refinancing everything didn't necessarily cost any more in interest. It's much more complicated with tax considerations, but the breakeven was about 4.75% on the new mortgage. That's what made it interesting since even pretty conservative investors use 5% for projected investment returns.

Agreed the HELOC is a better choice. I didn't realize 10+ year HELOCs existed. That used to be called a 2nd mortgage at 50-100% higher rates.

[csciora]

StarTrekDoc wrote:

What’s your endgame for the cash?   If only for a Emergency Fund, it doesn’t make much sense.  This is the challenge of living in a HCOL house rich situation.  Sure, it counts to the net worth, but it’s a relatively locked in unless you want to take out the equity and play with it.

We don’t pay down our mortgage and keep 600k on it with an equal taxable account that’s highly conservative.  This allows some leverage of the house and use to stay ahead of the dollars — but it’s just a little ahead and very conservative on it since the mortgage at risk

Click to expand...

Getting to your position (equal balance between mortgage and conservative investments) is exactly the goal.

I wish we'd started with that perspective 10 years ago. It would have changed the home buying approach considerably.

[Donnie]

csciora wrote:

Donnie wrote:

More information could be helpful (other savings, net worth, income level, stability of job, use of borrowings (emergency fund?), etc.). Based on the OP, I see no reason to do what you propose. Just get a HELOC. I could run the numbers at some point, but the way I understand it, you want to borrow money that you have no current use for to hedge against future interest rates increasing or home values declining if you need to borrow money in the future. You are paying a hefty cost in current interest payments for that hedge.

Click to expand…

Yes, it’s absolutely a hedge.

Surprisingly, hefty costs weren’t the case based on the projections I ran. Picture the simplest case of investment returns matching the loan rate. The HELOC is definitely a better choice since only the cash out portion is subject to the higher rates. But even refinancing everything didn’t necessarily cost any more in interest. It’s much more complicated with tax considerations, but the breakeven was about 4.75% on the new mortgage. That’s what made it interesting since even pretty conservative investors use 5% for projected investment returns.

Agreed the HELOC is a better choice. I didn’t realize 10+ year HELOCs existed. That used to be called a 2nd mortgage at 50-100% higher rates.

Click to expand...

What you are now describing isn’t really a hedge.  You are describing “levering up”  to enhance returns.   Borrowing against your house to invest in other places is not necessarily a bad idea, but it certainly increases your risk.  Where you are in your career and your goals will determine if you should consider something like this.  If you have many years of high income earning ahead of you and your goal is to maximize wealth, it could be worth it.  If you are nearing retirement or your goal is traditional steady accumulation of savings for retirement, it probably isn’t.

More details on your specific situation would help get you better feedback.

[StarTrekDoc]

csciora wrote:

StarTrekDoc wrote:

What’s your endgame for the cash?   If only for a Emergency Fund, it doesn’t make much sense.  This is the challenge of living in a HCOL house rich situation.  Sure, it counts to the net worth, but it’s a relatively locked in unless you want to take out the equity and play with it.

We don’t pay down our mortgage and keep 600k on it with an equal taxable account that’s highly conservative.  This allows some leverage of the house and use to stay ahead of the dollars — but it’s just a little ahead and very conservative on it since the mortgage at risk

Click to expand…

Getting to your position (equal balance between mortgage and conservative investments) is exactly the goal.

I wish we’d started with that perspective 10 years ago. It would have changed the home buying approach considerably.

Click to expand...

If that's your goal, the 15yr loan is the wrong product.  If 10 years ago, you're 5 years left on the mortgage?  That math and HCOL and equity don't quite math out logically with the 10 yr run we've had....so specifics in goals and assets and timeline as Donnie mentioned are needed for more specific answers.

In general, it's a risk to pull $$$ out of your primary home.  There's balance to be had and, but it's still an inherent risk that reversely, allows people to sleep well when they are free and clear on their primary homes (I don't since in fire/earthquake country, and sleeping on $1.4 of all my own risk home does not help me sleep .)

[csciora]

Donnie wrote:

csciora wrote:

Donnie wrote:

More information could be helpful (other savings, net worth, income level, stability of job, use of borrowings (emergency fund?), etc.). Based on the OP, I see no reason to do what you propose. Just get a HELOC. I could run the numbers at some point, but the way I understand it, you want to borrow money that you have no current use for to hedge against future interest rates increasing or home values declining if you need to borrow money in the future. You are paying a hefty cost in current interest payments for that hedge.

Click to expand…

Yes, it’s absolutely a hedge. Surprisingly, hefty costs weren’t the case based on the projections I ran. Picture the simplest case of investment returns matching the loan rate. The HELOC is definitely a better choice since only the cash out portion is subject to the higher rates. But even refinancing everything didn’t necessarily cost any more in interest. It’s much more complicated with tax considerations, but the breakeven was about 4.75% on the new mortgage. That’s what made it interesting since even pretty conservative investors use 5% for projected investment returns. Agreed the HELOC is a better choice. I didn’t realize 10+ year HELOCs existed. That used to be called a 2nd mortgage at 50-100% higher rates.

Click to expand…

What you are now describing isn’t really a hedge.  You are describing “levering up”  to enhance returns.   Borrowing against your house to invest in other places is not necessarily a bad idea, but it certainly increases your risk.  Where you are in your career and your goals will determine if you should consider something like this.  If you have many years of high income earning ahead of you and your goal is to maximize wealth, it could be worth it.  If you are nearing retirement or your goal is traditional steady accumulation of savings for retirement, it probably isn’t. More details on your specific situation would help get you better feedback.

Click to expand...

I just turned 50 with (hopefully) plenty of high income years ahead. Wife is F/T stay-at-home mom wrangling two young girls with minimal side income. Net worth around $600K with a heavy majority tied up in house equity and small business equity. Current debt is the mortgage ($335K @ 2.75% 15 year fixed) and a few thousand dollars from a short-term car loan (3.75% 2 year). Since we're nowhere close to wanting to sell the house or the business (more likely to hand it off to a managing partner to run and buy another one within the next five years), I'm looking for a bigger margin of comfort with more liquid investments over the next 5-10 years while continuing to save/invest. Everything we've saved/built is from the past 10 years. Prior to that, it was the usual story of the perpetually cashflow starved entrepreneur with nothing saved. Although those days are long gone and our financial situation is *dramatically* improved, my chronic paranoia about running out of money during the first fifteen years still pops up once in a while. ;-)

"Cash is king" is a very old mantra and having money literally on hand (earned, saved or borrowed) is a huge psychological hedge, especially after the wild income swings from earlier days. One memorable pair of back to back years, I earned $250K followed by less than $5K the next. Definitely not the ideal situation for long-term investment and retirement planning, but we got pretty darn good at saving and not buying stuff on a whim.

I don't have any concerns about borrowing wildly and taking sixteen trips to Las Vegas next year. Far more likely, the roof will get reshingled next year and we'll take a handful of car vacation trips as usual. It's much cheaper than flying the family somewhere and we really like having both the Land Rover and our dogs along for mountain trips. There's really nothing else we're too excited about buying. Not sure whether I should be proud or embarrassed that my big personal shopping list currently consists of a whale shaped butter dish, hiking boots and rollup chess set.

p.s. Had to look up HCOL. Assuming you don't mean "Honolulu Church of Light", we're definitely in one of the highest HCOL areas nationwide. Honestly, it's really only noticeable for eating out, car repairs and contractor repairs though. I don't notice things being dramatically cheaper when we travel.

[Dreamgiver]

csciora wrote:

Donnie wrote:

csciora wrote:

Donnie wrote:

More information could be helpful (other savings, net worth, income level, stability of job, use of borrowings (emergency fund?), etc.). Based on the OP, I see no reason to do what you propose. Just get a HELOC. I could run the numbers at some point, but the way I understand it, you want to borrow money that you have no current use for to hedge against future interest rates increasing or home values declining if you need to borrow money in the future. You are paying a hefty cost in current interest payments for that hedge.

 

Click to expand…

Yes, it’s absolutely a hedge. Surprisingly, hefty costs weren’t the case based on the projections I ran. Picture the simplest case of investment returns matching the loan rate. The HELOC is definitely a better choice since only the cash out portion is subject to the higher rates. But even refinancing everything didn’t necessarily cost any more in interest. It’s much more complicated with tax considerations, but the breakeven was about 4.75% on the new mortgage. That’s what made it interesting since even pretty conservative investors use 5% for projected investment returns. Agreed the HELOC is a better choice. I didn’t realize 10+ year HELOCs existed. That used to be called a 2nd mortgage at 50-100% higher rates.

Click to expand…

What you are now describing isn’t really a hedge.  You are describing “levering up”  to enhance returns.   Borrowing against your house to invest in other places is not necessarily a bad idea, but it certainly increases your risk.  Where you are in your career and your goals will determine if you should consider something like this.  If you have many years of high income earning ahead of you and your goal is to maximize wealth, it could be worth it.  If you are nearing retirement or your goal is traditional steady accumulation of savings for retirement, it probably isn’t. More details on your specific situation would help get you better feedback.

Click to expand…

I just turned 50 with (hopefully) plenty of high income years ahead. Wife is F/T stay-at-home mom wrangling two young girls with minimal side income. Net worth around $600K with a heavy majority tied up in house equity and small business equity. Current debt is the mortgage ($335K @ 2.75% 15 year fixed) and a few thousand dollars from a short-term car loan (3.75% 2 year). Since we’re nowhere close to wanting to sell the house or the business (more likely to hand it off to a managing partner to run and buy another one within the next five years), I’m looking for a bigger margin of comfort with more liquid investments over the next 5-10 years while continuing to save/invest. Everything we’ve saved/built is from the past 10 years. Prior to that, it was the usual story of the perpetually cashflow starved entrepreneur with nothing saved. Although those days are long gone and our financial situation is *dramatically* improved, my chronic paranoia about running out of money during the first fifteen years still pops up once in a while. ????

“Cash is king” is a very old mantra and having money literally on hand (earned, saved or borrowed) is a huge psychological hedge, especially after the wild income swings from earlier days. One memorable pair of back to back years, I earned $250K followed by less than $5K the next. Definitely not the ideal situation for long-term investment and retirement planning, but we got pretty darn good at saving and not buying stuff on a whim.

I don’t have any concerns about borrowing wildly and taking sixteen trips to Las Vegas next year. Far more likely, the roof will get reshingled next year and we’ll take a handful of car vacation trips as usual. It’s much cheaper than flying the family somewhere and we really like having both the Land Rover and our dogs along for mountain trips. There’s really nothing else we’re too excited about buying. Not sure whether I should be proud or embarrassed that my big personal shopping list currently consists of a whale shaped butter dish, hiking boots and rollup chess set.

p.s. Had to look up HCOL. Assuming you don’t mean “Honolulu Church of Light”, we’re definitely in one of the highest HCOL areas nationwide. Honestly, it’s really only noticeable for eating out, car repairs and contractor repairs though. I don’t notice things being dramatically cheaper when we travel.

Click to expand...

HCOL means mostly high tax burden, high real estate costs, not expensive milk and eggs. 

[Donnie]

I wouldn’t “lever up” in your position.  $600k is not enough of a nest egg that you could easily withstand a significant and prolonged downturn in the economy and the stock and housing markets since you have only ~15 high income years ahead of you.  With your current net worth, you probably need to stay aggressive with asset allocations to meet your goals.  If you are saving ~$50k per year as was implied by your post, you could have about $2.5M net worth in 15 years at a 6% annual return, which could be enough to retire on if you plan to spend ~$100k per year.