cash-out refi vs selling equities, for home improvements

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turfman
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Joined: Sat Jun 29, 2013 11:31 am

cash-out refi vs selling equities, for home improvements

Post by turfman » Thu May 21, 2020 12:00 am

We are 6 years into a 7/1 ARM (currently at 3.375%), so we are refinancing soon (in fact, a couple days ago, we locked in a 30y fixed at 3.125%, though we have not yet finalized that loan).

We had been planning the refi to simply replace the existing loan, move to a fixed rate, and take advantage of lower rates in the process. But now we are considering doing a cash-out refi to raise funds for building an addition to the home. But, for various reasons, we are not certain of the schedule for that addition: I think there is a 65% chance we will do it in the next 12-18 months, and a 35% chance we will do it in 3-4 years. The cost would be approximately $30k, and we would look to raise about $15-20k from the cash-out refi. After getting the cash and before spending it on the addition, we would invest the funds in some combination of equities and high-yield savings (our APY on the high-yield savings is currently at 1.3%).

We could, instead, sell equities to pay for the home addition. But this would leave our emergency fund a little depleted; it would take our 6-month emergency fund down to about 3-4 months. (Yes, a big chunk of our emergency fund is in equities. I know this isn't standard, but the majority of our income comes from a very safe source -- DW is a tenured professor at a well-endowed university -- so we have about 1/3 of the emergency fund in a savings account, and 2/3 in equities.)

If we were refinancing *only* to raise cash for improvements, it seems wiser to sell the equities (avoid closing costs, and avoid interest payments for the intervening time before we do the improvements). But given that we are refinancing anyway -- to convert the ARM to fixed, and reduce the rate to boot -- it seems like maybe drawing out some cash is not a bad idea. On the other hand, given the uncertainty over when we'd do the improvements, the proposition feels a lot like doing a cash-out refi to raise funds for investing, which I generally think is a bad idea. (Although this opinion is not well-formed, so I am open to arguments that it's a good idea after all.)

Other details, in case they are useful: current mortgage is about $270k, value of home is about $450k. No other debt. Excellent credit, and we plan to keep it that way. We save about 20-25% of income into retirement funds at present, and I believe that savings rate is appropriate given our long-term goals.

One more quick question, while I am here and talking about refinancing. Is it a good idea to apply for loans from multiple lenders at the same time, to shop around for the best rates? From what I've read elsewhere, this seems like a good idea, but I read an old thread on this forum in which someone casually advised against it (but without a reason, just "I'd advise against that"). My understanding is that the multiple hard credit inquiries don't count against our credit scores, because the credit rating companies understand we're shopping around. Is this true? Are there any other "costs" of multiple applications?

Thanks in advance!

Olemiss540
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Re: cash-out refi vs selling equities, for home improvements

Post by Olemiss540 » Thu May 21, 2020 7:03 am

I would NOT barrow against your home to invest in equities regardless of which route you end up with.

How are you doing in terms of retirement savings? What's your nest egg, gross income, age, and planned retirement date?

If your finances are in order I would personally save cash until i had enough to pay for it. Divert other savings into your house remodel fund to meet whatever timeline you needed to hit as long as it wouldn't jeopardize your long term financial plans.

I personally wouldn't take on additional debt for a luxury, but if you were going to do it regardless you could consider a Heloc. This way you ate not paying for the luxury through higher mortgage rates and over 15 or 30 years.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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Watty
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Re: cash-out refi vs selling equities, for home improvements

Post by Watty » Thu May 21, 2020 7:42 am

turfman wrote:
Thu May 21, 2020 12:00 am
I think there is a 65% chance we will do it in the next 12-18 months, and a 35% chance we will do it in 3-4 years. The cost would be approximately $30k, and we would look to raise about $15-20k from the cash-out refi.
I would assumed that your current loan is amortized over 30 year so you have about 24 years left. If you get a new 30 year mortgage at a lower interest rate then your required mortgage payment should be a lot lower. If you just save the difference then I would think that you would have a lot of the money that you would need to do the remodel by the time you are ready to do it especially if you do not do it for 3 years. It would be good to run the numbers for that.

There is also a non-zero chance that you will never do the remodel if your situation changes or you decide to move.

Borrowing the money a year before you need it does not make any sense especially since it would leave you with a higher mortgage payment for the next 30 years.

Since you only need a relatively small amount I would just use a Home equity line of credit for the rest if you needed to. You might also be able to do something like get a credit card with a 0% rate to fund the difference.

petulant
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Re: cash-out refi vs selling equities, for home improvements

Post by petulant » Thu May 21, 2020 7:46 am

Watty wrote:
Thu May 21, 2020 7:42 am
turfman wrote:
Thu May 21, 2020 12:00 am
I think there is a 65% chance we will do it in the next 12-18 months, and a 35% chance we will do it in 3-4 years. The cost would be approximately $30k, and we would look to raise about $15-20k from the cash-out refi.
I would assumed that your current loan is amortized over 30 year so you have about 24 years left. If you get a new 30 year mortgage at a lower interest rate then your required mortgage payment should be a lot lower. If you just save the difference then I would think that you would have a lot of the money that you would need to do the remodel by the time you are ready to do it especially if you do not do it for 3 years. It would be good to run the numbers for that.

There is also a non-zero chance that you will never do the remodel if your situation changes or you decide to move.

Borrowing the money a year before you need it does not make any sense especially since it would leave you with a higher mortgage payment for the next 30 years.

Since you only need a relatively small amount I would just use a Home equity line of credit for the rest if you needed to. You might also be able to do something like get a credit card with a 0% rate to fund the difference.
This seems right to me. Why increase debt now when you can just wait until the time for remodel, then decide the appropriate mix of cash, stock sales, and new debt (HELOC or otherwise) at that point? In the meantime, new savings after funding tax-advantaged accounts can just go to cash.

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BrandonBogle
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Re: cash-out refi vs selling equities, for home improvements

Post by BrandonBogle » Thu May 21, 2020 6:44 pm

Watty wrote:
Thu May 21, 2020 7:42 am
turfman wrote:
Thu May 21, 2020 12:00 am
I think there is a 65% chance we will do it in the next 12-18 months, and a 35% chance we will do it in 3-4 years. The cost would be approximately $30k, and we would look to raise about $15-20k from the cash-out refi.
I would assumed that your current loan is amortized over 30 year so you have about 24 years left. If you get a new 30 year mortgage at a lower interest rate then your required mortgage payment should be a lot lower. If you just save the difference then I would think that you would have a lot of the money that you would need to do the remodel by the time you are ready to do it especially if you do not do it for 3 years. It would be good to run the numbers for that.

There is also a non-zero chance that you will never do the remodel if your situation changes or you decide to move.

Borrowing the money a year before you need it does not make any sense especially since it would leave you with a higher mortgage payment for the next 30 years.

Since you only need a relatively small amount I would just use a Home equity line of credit for the rest if you needed to. You might also be able to do something like get a credit card with a 0% rate to fund the difference.
I concur with Watty. I just want to add that after you’ve saved up for the remodel, switch over to paying the old mortgage payment and don’t take 30 new years to pay off the mortgage.

Topic Author
turfman
Posts: 4
Joined: Sat Jun 29, 2013 11:31 am

Re: cash-out refi vs selling equities, for home improvements

Post by turfman » Thu May 21, 2020 8:42 pm

These responses are very useful -- thanks, all. We'll pass on the cash-out option, and indeed, the plan is to pay down the new 30y mortgage as fast as we can. It looks like the rate will be either 3.0 or 3.125, so when the stock market looks like a better deal again, we might shunt extra cash that direction for a bit. But our retirement plan (circa 2040) includes owning our home outright, so we want to be on a 20-year schedule for the mortgage repayment...

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