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Cash Out Refi? Primary Residence / Net Worth

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  • Cash Out Refi? Primary Residence / Net Worth

    Sorry, another refi post, but this one is with a twist

    My primary residence is my last debt, and I'm on track to pay it off in December this year. The home value is somewhere in the $400k range. I'm in my low 30s and my goal is to hit FI in the next 10 years. As my name suggests, I'm not a doc. I work in the energy industry where pay is high but job security is shaky. From a net worth perspective, my primary residence makes up just short of 50% of my net worth, and my marginal tax rate is 22%. Married, and regularly itemize on taxes.

    Since the crisis, and the ensuing drop in mortgage rates, I've been contemplating pulling some equity out of my home via a cash out refi to invest in the market. Most blog posts I've found on this topic say this is a bad idea, but the examples they all provide are of hypothetical people that are still years away from knocking out their mortgage, not someone with 95% home equity.

    Mind you, when I say invest in the market, what I mean is invest in a bond fund/preferred security or something of modest risk, such that I would borrow from my house at ~3% (~2.3% after deducting mortgage interest), collect on a bond at around 3-5% AFIT, and pocket the difference. In essence, I'd be diversifying my primary residence, adding a wedge of funds to get past the standard deduction threshold each year, and trying to earn a little extra by being more risk-on with the equity-turned-cash.

    My questions are:
    - is this reasonable? Are the costs of doing a refi prohibitive to my goal?
    - For those of you with positive and growing net worths, what % of your NW is tied up in your primary residence?
    - Is there a target % of your NW that you want in your home by the time you hit FI

    Thanks in advance for any comments/questions/discussion

  • #2
    so what bond fund is paying you 5% right now.....

    Comment


    • #3
      it's not insane but it's needlessly complicated.

      if you feel like your job security isn't amazing i wouldn't be looking to complicate things.

      slow and steady wins this race. the ones who make the big hit are always crowing about it but plenty don't and are just sitting by themselves at the corner of the bar.

      Comment


      • #4
        Pass. For me anyway. Some people love the idea of more debt and invest the rest but the who thing falls apart if you do not stick to it 100%. if you spend any of that money you would have been better off keeping the paid off home.
        Also if your job is shaky I would want low expenses which a paid off home can help with.

        About 15% of my NW is my home equity

        I do not have a target NW I want in my home. I hope to shrink the percent as everything else grows faster.

        Comment


        • #5
          I was sort of contemplating this scenario a few weeks ago when I thought I was stuck doing a cash out refi and the cabin we planned to buy with the money fell through. I was like what am I gonna do with an extra 100k?? Ultimately we were able to switch to a normal 15 yr refinance and I was very relieved. I suppose it would probably be fine but I'd just sleep better at night with less debt. If your job is shaky why don't you just pay that house off in December and then invest the mortgage payment each month moving forward (assuming you have a solid EF in place)? I don't think of my home as an investment and I hope that over time it's place in my net worth will shrink. Currently it's worth between 25-33% of our NW.

          Comment


          • #6
            Think of the house as a consumption item, not an investment. The move is simple leverage to attempt to capture perceived alpha. That is a poor move with conservative investing.
            What it costs you is more risk, I view it as uncompensated risk. Not from the AA change (although less RE vs market is higher risk), mostly the energy industry. The valuable human capital has taken on a lot of risk. Employment at any level is volatile, with few options with cutbacks. Kill the mortgage and then pump the investments on a more aggressive overall allocation. Itemized deductions and bonds/preferreds won’t move the needle.

            Comment


            • #7
              Originally posted by MPMD View Post
              if you feel like your job security isn't amazing i wouldn't be looking to complicate things.

              Originally posted by Tim View Post
              What it costs you is more risk,
              ... I agree with both.

              Comment


              • #8
                Originally posted by Peds View Post
                so what bond fund is paying you 5% right now.....
                Just as an example, LANDP - It trades like a preferred, but the company treats this and other series like debt. There are other examples in the midstream energy business. Having worked for a bankrupt company before, my basic thesis is - if the company is paying a dividend, there are lots of other levels that get taken out before debt starts to devalue. Not to mention that debt is typically backstopped by an asset. That, combined with the fed backstopping the market, has me looking for opportunities in rated credit that's a little further down the list than the typical large cap.

                Thanks for the comment

                Comment


                • #9
                  When you have a mortgage keep in mind the monthly payments reduce your investable cash flow anyway. In addition you will have another round of closing costs. Since market investing really doesn't require a lump sum up front (as opposed to a large purchase), I don't really see a good reason to refinance in your situation. If you still want some leverage, I would do a line of credit that you can repeatedly access if you do want extra money to invest if the markets continue to do well or present a great opportunity with a major correction, but you do so incrementally in case your job situation changes. Also, with a credit line generally no closing costs up to $500K. Rates are likely to stay low barring a consistent surge in inflation.These days HELOC's are available for prime minus 50-75 basis points with good credit and a banking relationship.

                  I don't want to be a hypocrite so for full disclosure I borrowed the full conforming amount against my paid off home to partially finance a commercial office building, but the project was fully paid off within 3 years. I have also had a HELOC on my homes for the past 20 years as an emergency/opportunity fund.

                  Comment


                  • #10
                    We've been moving towards investing in small multifamily. As part of this, we've established a HELOC that we can draw on to very quickly get upwards of several hundred thousand in cash, while not having to hold that much liquid cash waiting on a deal to come along. In the event we do make a move with this cash, we would quickly repay the loan. Having quick cash can create opportunity for a fast cash sale at a depressed price, and the loan can be repaid in 6 months with a cash out refinance of a cash-flowing rental property, or else just from focused saving.

                    This is high risk, high reward option, that is only practicable as we have everything else in order. If you have everything else how you want it, I'd say go for it. Keep 30-50% equity in the house at least if you are planning this for a long term option

                    I wouldn't do a HELOC if you are planning to buy and hold. HELOCs have variable rates, so you could be in a far worse spot if interest rates change at a time you don't want to sell. The cash-out refinance will give you the opportunity to lock down that money for 15-30 years with no interest rate risk.

                    Comment


                    • #11
                      Originally posted by PETE_notadoc View Post
                      Sorry, another refi post, but this one is with a twist

                      My primary residence is my last debt, and I'm on track to pay it off in December this year. The home value is somewhere in the $400k range. I'm in my low 30s and my goal is to hit FI in the next 10 years. As my name suggests, I'm not a doc. I work in the energy industry where pay is high but job security is shaky. From a net worth perspective, my primary residence makes up just short of 50% of my net worth, and my marginal tax rate is 22%. Married, and regularly itemize on taxes.

                      Since the crisis, and the ensuing drop in mortgage rates, I've been contemplating pulling some equity out of my home via a cash out refi to invest in the market. Most blog posts I've found on this topic say this is a bad idea, but the examples they all provide are of hypothetical people that are still years away from knocking out their mortgage, not someone with 95% home equity.

                      Mind you, when I say invest in the market, what I mean is invest in a bond fund/preferred security or something of modest risk, such that I would borrow from my house at ~3% (~2.3% after deducting mortgage interest), collect on a bond at around 3-5% AFIT, and pocket the difference. In essence, I'd be diversifying my primary residence, adding a wedge of funds to get past the standard deduction threshold each year, and trying to earn a little extra by being more risk-on with the equity-turned-cash.

                      My questions are:
                      - is this reasonable? Are the costs of doing a refi prohibitive to my goal?
                      - For those of you with positive and growing net worths, what % of your NW is tied up in your primary residence?
                      - Is there a target % of your NW that you want in your home by the time you hit FI

                      Thanks in advance for any comments/questions/discussion
                      Well, if you feel you can stomach the risk, go for it. I mean, worst case scenario, you lose your job and cant' afford your payments anymore, you could theoretically just let the bank foreclose on your house and you get to keep the money you borrowed in investments. So, if you don't mind renting for 7 years after your credit is ruined, might be a pretty smooth way to get a bunch of cash for nothing. Check the fine print on the mortgage terms though and make sure the bank isn't allowed to come after you after foreclosure.

                      Comment

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