CashOut Refinance

[SMIndex]

Hi Bogleheads, I have been a long time reader and follow bogleheads philosophy . I would like to get some inputs from fellow bogleheads for the situation I am considering.

We bought a house in for 485k and went with 15 year /300k mortgage. We put in all the equity that we got by selling our townhouse.
after 5 years of paying into it, our mortgage balance is 210k and 10 more years to go with 2.875 interest rate.
Our house is valued between 600k-650k .

I am 45 and hubby 52, with kids 16/11 . We also want to support our kids education.

Retirement funds - 1.2 m
Taxable 400k.

The equity in our house is more than 400k and it is illiquid. I am considering to pull out 80k and refinance to 300k/15 years.
The reason I want to pull out is, we spent 40k on upgrades ( hardwoods on all the floors) and we are planning to do some more in the coming years which means more money on the house.We will be downsizing once the younger one goes to college .

What do you think? Cashout refinance makes sense?

I have given this idea to my husband and he agrees with me.

Thoughts?
Thank you!

[bloom2708]

I would use taxable funds and keep dropping the mortgage.

You aren't going to get 2.875% any longer. Plus there will be a good bit of closing costs/fees. Dead money.

A "forever mortgage" is a lifestyle decision. If you both agree and are OK with the new rate and closing costs, then no permission needed.

[SMIndex]

Thank you . Would it be crazy to invest that 80k ?

[lakpr]

Thank you . Would it be crazy to invest that 80k ?

Multiple things here. The recent Tax Cuts and Jobs Act has made cash-out refinances generally NOT eligible for mortgage interest deduction. They are eligible for mortgage interest deduction, IF the entire proceeds are used to "substantially improve" the home. Perhaps the hardwood floors etc., and the additional remodeling that you plan on spending on the home, does count to answer the question of mortgage deductibility.

Your total balance will only be $380k after refinancing. When I looked at Bankrate, the 10 year mortgages are going around 3.00%, and 15 year mortgages around 3.25%. So you are going to be INCREASING your interest rate, not decreasing it, if you refinance.

Now, even assuming a 3.25% rate on a 380k mortgage, the total interest is $12,350. Coupled with max SALT deduction, it's $22,350. Still less than the standard mortgage deduction of $24,400. In other words, the higher mortgage principal does NOT get you any tax deductions. Or, you have simply increased the interest rate burden on the existing $210k balance as well, for the sake of additional $80k to be available for investment.

Bad idea.

It's also a bad idea for another reason. Paying down the mortgage is a GUARANTEED RETURN on your money. In your case, a guaranteed after-tax return of 2.875%. The BEST guaranteed returns in the market place now are CDs and Money Market funds, yielding about 1.75% taxable, more like 1.25% after-tax. You will be earning 2.5 times more.

[unclescrooge]

Having just pulled out equity from my home to invest, I think that's a bad idea.

You have $400k in taxable account and you need $80k to do home upgrades? This is just mental accounting. You're moving money from one pocket to another, and just penalizing yourself for that.

[delamer]

Having just pulled out equity from my home to invest, I think that's a bad idea.

You have $400k in taxable account and you need $80k to do home upgrades? This is just mental accounting. You're moving money from one pocket to another, and just penalizing yourself for that.

I agree with this.

Also, if you know that you are going to move in 7 years, then why put more money into the house by way of upgrades? You need to do maintenance, of course. But why upgrade if you are concerned about having more money tied up in the house?

[RickBoglehead]

Really bad idea.

[GoldenFinch]

I agree that this is a bad idea. You have a great rate. What you are proposing not only adds risk to your financial picture, it could get expensive on top of the risk with a higher rate and all the closing costs. If you had a 4% rate on your original mortgage it would make more sense. Also, the idea of cashing out to invest the money could cause some future regret. You seem to have everything in place already so the best bet is to keep doing what you’re doing.

[sergeant]

Bad idea! Use funds from taxable to make the improvements. Realize that you will probably not realize the amount spent on the improvements back when you sell in 7 years. I would not refi at a higher rate than I was already paying. I would not borrow money to invest under current circumstances.

[Invest2016]

I say go for it!

[SovereignInvestor]

I don't think it's a bad idea if most of money in taxable account would have high taxes on un realized gains. If there is cash sitting in monew market in taxable account then it seems pointless to refinance and incur those costs and raise the mortgage rate to access cash you have sitting there in an account getting lower return than the mortgage costs.

[SMIndex]

Thank you for all your replies.

Prob. I will just leave as it is .

[Admiral]

You have a 16 YO. I'd be more focused on college and less on home upgrades in the next 8 years. College is expensive. 400k helps. But assuming you are high earners, you will be unlikely to get financial aid. That means you will be paying, something, perhaps a lot, for two kids. Save the addl upgrades for when college is done.