Would it be a smart move to do a cash out refinance, and invest the funds, while I wait for house prices to lower, then buy a second home?

Would it be a smart move to do a cash out refinance, and invest the funds, while I wait for house prices to lower, then buy a second home?
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#1

My house has about $400,000 in accumulated equity.

The plan is to do a cash out refinance to lower my interest from 5.5% to 3.5% and get $150,000 cash. The $50,000 will be used to pay off credit card debt, a car, and home repairs. The $100,000 will be saved and invested elsewhere.


#2

Not a good idea. This is something that looks good in theory, rarely works so well in practice. Let me offer some reasons. Paying off credit card with mortgage is a bad idea all around. Yes, interest rate is less, and it is tax deductible - but now you are repaying over 15 or 30 years. With decent budget discipline, you can payoff that card in a few years using cash flow. Furthermore, most people who payoff credit card debt with mortgage money go straight back to using the credit card and running up debt again. Same argument for buying a car. Never use 15 or 30 year loan to buy an asset you will only keep for 5 or 10 years. And if something happens and you can’t make payments for some reason, you put your home at risk. Why do that?
As for borrowing to invest, that is called leverage. It magnifies your risk many fold. If you borrow 100,000 and invest, and we have a financial crisis where your investments lose 50% - your asset is now only worth 50k while your debt is still $100k.
Be proud of the fact that you have paid off your home. Payoff your debt with cash flow, and leave the financial engineering to the folks at Goldman Sachs.


#3

Hi! Thank you for writing! I agree with James Kinney’s advice - so spot on. I didn’t understand, however, if your home is completely paid off or if you are still paying on the mortgage. Since you say that your interest rate is 5.5%, it makes me think that you still owe something on the mortgage. You have $400K in equity, so the amount left depends of course on how much you financed. I agree with James that getting cash out pay off debt isn’t a good idea, but it could be worth it to refinance the remaining amount from 5.5% to 3.5%. Run the numbers with a mortgage professional to see if refinancing costs will be worth it. But you could save some interest on the remaining balance by dropping the interest rate. Best wishes to you!


#4

The $100,000 what-if sounds speculative and I wouldn’t easily recommend it. However, rates are still in your favor to refinance to lower your 5.5% rate. And mathematically it might make good sense to do a cash out to refinance all your other existing debts if they are at higher interest rates. - The Savings Coach


#5

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