So, you’re thinking about a cash-out mortgage refinance? This is where you borrow more than you owe on your house and keep the extra cash. It’s a way to tap into your home’s equity. But, using this cash to buy stocks? Not the best idea. You could lose big in a bear market.
Instead, consider a Home Equity Line Of Credit (HELOC). But even then, using a cash-out refinance to buy stocks, especially with the market at record highs post-pandemic, isn’t the wisest move.
Here’s an example: if your home is worth $1,000,000 and you have a $500,000 mortgage, you could refinance up to $800,000 and pocket $300,000 in cash. But should you?
The 10-year bond yield has hit near all-time lows due to the pandemic, and even as the economy recovers, it’s stayed low. This has increased the temptation to use a cash-out refinance to buy stocks. But I’d advise against it.
In 2019, we bought a larger house with cash, which saved us from a market meltdown. Now, the question is whether it’s wise to do a cash-out refinance and invest all that equity in the stock market. I’ve been asked this a lot lately, especially with the S&P 500 near an all-time high.
If you’re considering a cash-out refinance to buy stocks, here are some pros and cons:
Pros:
- You could lock in massive outperformance if the S&P 500 is down for the year and you buy stocks.
- You could take advantage of low interest rates.
- You could diversify your net worth.
- You might get a tax deduction.
Cons:
- Refinancing takes time and costs money.
- You could lose money.
- You increase your risk of foreclosure.
- You complicate your finances and your life.
In conclusion, a cash-out refinance to buy stocks isn’t the best financial move. If you really want to use your home equity to buy stocks, wait for at least a 30% correction in the S&P 500.
The smartest thing you can do with your cash-out refinance is to pay off higher interest rate debt. As for me, I plan to keep life simple and live in our new home without a mortgage.
If the S&P 500 corrects by 30%, I might consider a cash-out refinance, but only if mortgage rates have gone even lower. Whatever happens, I’ll always be investing some of my monthly cash flow into the market.
The bottom line is, don’t do a cash-out refinance to buy stocks. Always have enough cash on hand to take advantage of investment opportunities. Refinance your mortgage when Treasury yields fall to all-time lows. And hold onto your property for longer if you’ve locked in a great mortgage rate.
You might want to consider a cash-out refinance to buy more real estate instead. Real estate is less volatile and provides income. Or, consider investing in private growth companies through an open venture capital fund.
But if you’re set on a cash-out refinance to buy stocks, make sure you can withstand a 1-2 year bear market. If you can handle losing ~30% of your portfolio’s value while paying more mortgage interest, then maybe you’ll be OK. But the better strategy is to keep paying down debt and invest only with the cash you have.
