Cash out Refinance to Buy Stocks?

A cash-out mortgage refinance allows you to borrow more than you owe, against your homes equity, and keep the difference as cash. Taking out a Home Equity Line Of Credit (HELOC) is another way. 

Normally the most you can borrow from your house is 80% loan-to-value (LTV). So if your home is worth $1,000,000, and you have a $500,000 mortgage, the most you can refinance would be $800,000 and receive $300,000 in cash, and this money is tax free because it’s a loan that you will have to repay but can be very powerful in building a higher net worth or passive income. 

Cash-out Refinance To Buy Stocks

With the coronavirus and other factors, the 10-year bond yield and 30-year bond yield have both fallen to new all-time lows. The 10-year bond yield is now below 1% after the Fed announced a surprise 50 bps Fed Funds cut. More Fed rate cuts in the future are very possible as well.

With many investors cash heavy and unsure how the stock market will perform in the short term, many are turning to other vehicles to hold their wealth. This should help slow any major swings in real estate prices, as investors buy into investment properties. And rental prices even through 08-09 were much less affected than housing prices and the stock market. Some may take this time to do just the opposite and free up money to buy into a depressed market and get stocks while they are on sale. 

If you are thinking of doing a cash-out refinance to buy stocks, here are some of my pros and cons.

Pros Of A Cash-out Refi To Buy Stocks

1) Lock in massive outperformance. Let’s assume the S&P 500 is down 10% for the year when you purchase stocks. You would be able to lock in 10% outperformance on your cash-out capital. No matter whether the S&P 500 continues to go down or up, you will always be outperforming.

Although it’s great to make money when it comes to investing, the next best thing is outperforming the index or your peers. If an active fund manager were to outperform his benchmark by 10%, that would plave him in the top 1% of active fund managers. Given this performance, he’d probably get a huge bonus and attract a massive amount of assets and new investors.

To gain true wealth, you must outperform the average, otherwise, you’ll always be just average. 

Related: How to Passively Invest in Real Estate

2) Take advantage of all-time low interest rates. The Fed cuts interest rates to make money easier to get and increase economic activity. The lower interest rates go, the more people and businesses tend to borrow to buy equipment, property, goods, and services. Doing a cash-out refinance to spend is in line with the Fed’s desires. 

If inflation is running around 2% and you can get a mortgage rate at 2.425%, your real interest rate is only 0.425%. The lower the real interest rate hurdle, the higher the chance of earning a greater return. From a nominal return basis, the 2.425% mortgage interest rate drag on returns is comparable to paying a traditional wealth manager to manage your wealth or investing in a hedge fund which charges 2% of assets and takes 20% of profits. 

Everybody should consider refinancing their mortgage today. But not everybody should be doing a cash-out refinance. 

3) Diversify net worth. If you have a large percentage of your net worth in real estate, you may want to do a cash-out refinance to diversify your net worth. Note that your real estate exposure will only decrease based on your increased exposure in stocks. Your absolute real estate exposure won’t decrease since you haven’t sold any properties. You just have more debt.

4) You could get a tax deduction. The mortgage interest deduction may be available on a cash-out refinance if the money is used to buy, build or substantially improve your home. In general, homeowners who bought houses after Dec. 15, 2017, can deduct interest on the first $750,000 of the mortgage. Claiming the mortgage interest deduction requires itemizing on your tax return. As always, verify your situation with your accountant. 

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